Impact of proposed IHT changes can be mitigated
Farmers concerned about increased Inheritance Tax (IHT) due to changes to Agricultural Property Relief (APR) should look into ways to mitigate its impact on the next generation now, say leading audit, tax and business advisory firm, Blick Rothenberg.
Rob Goodley, a Partner at the firm, said: “In the Autumn Budget, the Government announced significant changes to a valuable IHT relief, APR.”
He added: “Under the proposed changes, effective from 6 April 2026, a £1m cap will apply to agricultural property which is, under the current rules, wholly relieved from IHT regardless of its value. Any value exceeding the £1m cap will only benefit from 50% tax relief rather than 100% relief. As the headline rate of IHT is 40%, this means that the effective rate of tax for transfers exceeding the cap will be 20%. This will be a significant rise for some farmers.
“However, if the changes do go ahead as announced, there are some ways to mitigate their impact.”
Rob said: “Farmers should review their wills considering the proposed changes. Assets can still pass between spouses free of IHT, and when assets pass between spouses on death, there is an uplift in the asset’s base cost for Capital Gains Tax (CGT) purposes despite the fact that no IHT liability arises. This can make onward gifts of assets by the surviving spouse to their children much more tax efficient.”
He added: “If an individual inherits a farm that is worth £11m on the death of their parent, then that could give rise to a £2m IHT liability. This is a significant liability to meet, and if there are minimal other assets passing on death, then paying the IHT liability will be difficult.”
Rob said: “Liabilities can be paid over a ten-year period. It has historically been the case that interest is payable where liabilities are paid in instalments like this, but the government has indicated that interest shouldn’t apply here. If dividends are taken from the business to fund this liability, those dividends themselves will be subject to Income Tax, meaning that the cash burden to the business will be around 50% higher than the headline IHT liability. Those inheriting a farm may be forced to sell some land, if not the whole farm, to pay the IHT.”
He added: “This tax funding issue could be resolved with appropriate life insurance policies to ensure there is money available to cover IHT costs, and farmers should evaluate their current policies in light of the Government’s proposals.”
Rob said: “There will also be benefits to making lifetime gifts to the next generation, rather than waiting until death to transfer assets. If the transferor survives for at least seven years after making a gift to an individual, then the gifted assets will not be subject to IHT. Where business assets are gifted, there is often no CGT to pay, meaning gifts can be made without a tax charge if done properly.”
He added: “However, the Government plans to introduce anti-forestalling rules for lifetime gifts made between 30 October 2024 and 5 April 2026 (inclusive) which will ensure that if the transferor dies on or after 6 April 2026, but within seven years of the gift, then the gift will be subject to this £1m APR cap. So, farmers should get expert advice before making gifts, including from insurers, so they don’t risk the next generation being caught out by IHT.”
Rob said: “At the same time, it is important to not make any hasty decisions on the back of this announcement. The significant change to this relief is not due to become law until 6 April 2026, giving farmers time to consult tax experts on what to do next. We have not yet seen any draft legislation from the Government – so the final proposals could yet differ from what was announced in the Budget.”
He added: “Finally, we have already seen a significant backlash against the Government in relation to these changes, and the backlash will likely grow in strength in the coming weeks. That backlash could result in a change or withdrawal of the proposed changes.”
