Autumn Budget – Changes to Agricultural Property Relief and Business Property Relief

In short, under the IHT rules as they stand today, most ownership interests in businesses and farms are not subject to IHT when they are transferred on death, regardless of their value. However, under the proposed changes, these two reliefs will be subject to a combined cap of £1m, with any value exceeding £1m benefitting from 50% relief rather than 100% relief. Given that the headline rate of IHT is 40%, that means that the applicable rate in respect of transfers exceeding the cap will be 20%.

This is a hugely significant change for business and farm owners. Those impacted should carefully consider their position with a view to mitigating the potential impact on their heirs, as well as the business or farm in question.

Background

Agricultural Property Relief (APR) and Business Property Relief (BPR) are two highly significant reliefs for IHT purposes. The two reliefs can briefly be summarised as follows:

Agricultural Property Relief

APR provides relief from IHT in relation to transfers of agricultural property situated in the UK. The relief is limited to the agricultural value of the property (which could be substantially less than its market value), but typically the entire agricultural value of the property is relieved from IHT under the current legislation where:

• The transferor has occupied the relevant property for agricultural purposes for at least two years, or
• The transferor has owned the relevant property for at least seven years, and that property has been occupied by the transferor or someone else for agricultural purposes.

In some circumstances, the relief is limited to 50% rather than 100%, but most relevant transfers qualify for 100% relief.

The intention of the legislation is clear – generally speaking, the transfer of agricultural land that is being farmed should not attract a liability to IHT.

Business Property Relief

BPR provides relief from IHT in respect of transfers of business interests (the term ‘business’ is broader than ‘trade’, but broadly speaking investment businesses are excluded from BPR). The rate of relief is 100% where the interest in question has been held for at least two years before the relevant transfer takes place, and the asset being transferred is any of the following:

• Property consisting of a business or interest in a business (for example, an interest in a trading partnership).
• Securities of a company which are unquoted and which (either by themselves or together with other such securities owned by the transferor and any unquoted shares so owned) gave the transferor control of the company immediately before the transfer.
• Any unquoted shares in a company that operates a business.

In other circumstances where BPR applies, relief is given at the rate of 50%.

Again, the intention of the legislation is clear – generally speaking, the transfer of a business interest should not attract a liability to IHT.

What is changing?

The proposed changes are summarised below. Please note that, at this stage, the Government has not shared any draft legislation.

Changes from 6 April 2025

The Government has announced that it intends to make a technical change to APR, which will be effective from 6 April 2025. Broadly speaking, this change will extend the scope of APR such that it covers land managed under an environmental agreement on behalf of a public body. In short, the Government wants to prevent the potential loss of APR being a barrier to the involvement of agricultural landowners and farmers in land use changes under an environmental agreement, in support of the Government’s wider environmental objectives. While this is a welcome change, it will be relevant to only a very small number of taxpayers.

Changes from 6 April 2026

The Government intends to make significant changes to APR and BPR with effect from 6 April 2026, which will materially reduce their value. In short, the proposed changes are as follows:

• As things stand, BPR is available at the rate of 100% in relation to ‘unquoted shares’, which means shares that are not listed on a recognised stock exchange. Not all stock exchanges are ‘recognised’ for these purposes, most notably the alternative investment market (AIM). The Government has confirmed that it intends to change the legislation such that shares which are listed on AIM (and similar exchanges) will attract 50% relief, rather than 100%.
• The Government intends to introduce a £1m cap on the availability of 100% relief under APR and BPR (this being a combined cap for both reliefs). The £1m cap is per individual and for their lifetime. Where the value of assets qualifying for 100% relief exceeds the £1m cap, the excess will be subject to relief at 50% (giving an effective IHT rate of 20%). It should be noted that the Government plans to introduce anti-forestalling rules in respect of 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 cap (without this rule, there would be a significant incentive to gift relevant assets between now and 5 April 2026).

The reliefs as they currently stand have driven certain behaviours that the Government no doubt had in mind when proposing these changes. In particular, UK agricultural land and shares which are listed on AIM have long been considered more attractive investment assets because of the availability of these reliefs. It is not wholly surprising that the Government would wish to make changes to these reliefs to remove those incentives, which arguably cause market distortions. However, the changes clearly go much further than that – for example, the cap on APR impacts farmers who own the land that they are farming and are intending to pass their farming business on to their children when they die. In these circumstances, the estate will now need to find money to fund the IHT liability, which will in some cases result in land needing to be sold.

What should clients be doing?

In the first instance, we are recommending that our clients do not make any hasty decisions on the back of these announcements. The reasons for this are:

• The significant changes to these reliefs are not due to become law until 6 April 2026
• We have not yet seen any draft legislation from the Government
• We have already seen a significant backlash against the Government in relation to these changes, and we expect that backlash to only grow in strength in the coming weeks. That backlash could result in a change or withdrawal of the proposed changes, particularly with respect to the proposed £1m cap. We could, for example, see a more targeted change to APR (such that those undertaking farming activities themselves are unaffected) and/or a more substantial cap.

However, if the changes do go ahead as announced, then clients should be thinking about the following strategies:

Updating Wills

Clients should be reviewing their wills considering the proposed changes. In particular, it remains the case that assets can pass between spouses free of IHT, and where 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 much more tax efficient.

Furthermore, while we do not have draft legislation yet, the commentary released by HMRC on Budget Day suggests that the £1m cap on APR and BPR will not be a transferable allowance between spouses. If that is confirmed in due course, then there may be merit (where relevant) in both spouses looking to pass the first £1m of eligible assets to the next generation on the first death, with the remaining assets transferring to the surviving spouse.

Life Insurance

Life insurance for farmers and business owners is going to become a critical business continuity consideration. For example, if an individual inherits a business that is worth (say) £11m on the death of their mother, then that would give rise to a £2m IHT liability (ignoring any available exemptions which could reduce this liability, albeit not materially). That is clearly a significant liability to meet, and if there are minimal other assets passing on death, then there could easily be insufficient liquidity. While there is scope within the existing IHT framework for liabilities to be paid over a ten-year period, and even though the most recent guidance from the government is that they will not impose interest on these delayed payments which would be a significant easement compared to other IHT liabilities, we shouldn’t lose sight of the fact that if dividends are taken from the business to fund this liability, those dividends themselves will be subject to Income Tax (more than £3m of dividends would be needed to generate £2m of net-of-Income-Tax cash). On that basis, there will be instances where those inheriting a farm or business are forced into a sale process or, in the extreme, choose to close the farm or business to realise its balance sheet assets.

This tax funding issue could be resolved with appropriate life insurance policies, and individuals are likely to give this serious consideration with a view to limiting their exposure in the medium term. Longer-term, the strategies set out below can be considered.

Lifetime gifts / Fragmentation of ownership

There will now be a clear benefit in making lifetime gifts to the next generation, rather than waiting until death to transfer assets (transfers into trust are also now less attractive, given an IHT liability will arise when the trust is settled to the extent that the value transferred exceeds the £1m allowance, at ten-year intervals within the trust, and when property leaves the trust). It remains the case that if the transferor survives for at least seven years after making a gift to an individual, then the gifted assets will be completely outside of their IHT death estate.

There is going to be some complexity here, however, in terms of the tax analysis of any lifetime gifts to the next generation. While the IHT position should be relatively simple where the transferor survives for at least seven years post-gift, the gift itself will be a CGT event. The default position is that the transferor will be deemed to have sold the gifted asset for its prevailing market value, and CGT will be due on the resulting gain.

However, a specific relief (gift relief) can often be claimed such that the gain referenced above does not arise. The qualifying criteria for that relief differ from the IHT reliefs that are the subject of this article – for example, it could be the case that shares in a company qualify for BPR, but they do not qualify for gift relief because the company in question holds substantial investment assets and/or undertakes substantial investment activities (broadly, this can happen where more than 20% but less than 50% of the company’s assets and/or activities are non-trading in nature). On that basis, we would strongly recommend that detailed advice is taken before any gifts are made, especially where the underlying business holds assets which are not used in its trading activity, such as investment properties or excess cash. In some circumstances, it may be appropriate to undertake a ‘demerger’ transaction to separate trading and non-trading assets/activities, which would allow the trading elements to be passed to the next generation with the benefit of gift relief (such that no CGT liability arises in respect of that gift).

It is also important to note with gift relief that there is a requirement for the transferee to remain UK tax resident for a significant period. This is a constraint that should be understood in advance.

Lastly, it’s worth remembering that IHT is charged on the ‘loss to donor’ principle. Given valuations reflect matters such as control, its clearly the case that a 49% shareholding in a business that is worth £10m is not worth £4.9m – it is likely to be worth materially less than that amount given that a 49% shareholder does not (usually) have control. On that basis, even for individuals who don’t feel prepared to give all of their business away in their lifetimes, fragmenting the ownership between family members could still be a sensible course of action as when you add up the value of the shareholdings held by each individual, you will reach a number that is less than the value of the business as a whole.

Divestment

In short, the proposed changes make selling a business more attractive, especially in cases where the owner does not wish to make lifetime gifts and/or there is not a clear family succession in terms of business stewardship. The headline rate of CGT only increased from 20% to 24% in the Budget, and so a business sale remains attractive from a tax perspective.

Post-sale, the owner can gift the proceeds and no IHT will be due provided the transferor survives for at least seven years following the gift. Other IHT strategies can also potentially be employed, such as making regular gifts of income.

Emigration

Under the IHT rules as they stand today, most people who were born and raised in the UK would be subject to IHT on their death, regardless of whether they were living in the UK at the time of death or not. It is conceivable under the existing rules that someone could permanently emigrate from the UK aged 30, die aged 80, and still be subject to IHT.

Under the new rules, anyone who has been non-UK tax resident for at least ten consecutive tax years will be outside of the scope of IHT in respect of their non-UK situs assets. Such individuals will also be outside of the scope of UK CGT in respect of their non-UK situs assets, and most UK situs assets. Consequently, emigration provides significant opportunities for succession planning, and so we expect this to become a more popular strategy going forwards.

Would you like to know more?

If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact or Rob Goodley using the form below.