UK Budget - reforms to APR and BPR, what now for the farming community?

Following the Autumn Budget, the Government set out in a policy paper how it proposes to reform agricultural property relief ('APR') and business property relief ('BPR') from inheritance tax ('IHT'). Further detail will be put forward in due course and there will be a consultation in early 2025. These announcements came as a surprise to many in the farming and business community whom it is understood had been given reassurances that there would be no changes. There is a widespread feeling of betrayal amongst the rural community as evidenced by the protests in London this week.

When viewed alongside the relatively small amounts that the changes are expected to raise each year, it is difficult to understand the reason for the proposals particularly against a rhetoric of pro-growth and pro-business.  If these changes are due to a perception that taxpayers are investing in farmland for tax purposes, that is wide of the mark and inadvertently puts at risk the futures of thousands of businesses that keep the wheels of UK plc turning.

The statistics that the Government has provided for farmers and the references to reliefs that are available to non-farmers are a smoke screen.  The real question is do the changes affect a working farmer?  A simple example.  A modest 300-acre farm may be valued at more than £3m, ignoring farm buildings, equipment, stock and any farmhouse.  That business, which may be making a +/- 1% return will find itself paying IHT when the changes come in whatever the statistics say.

It has been called an 'impossible tax' as, for the vast majority of farmers, borrowing to pay the tax will not be viable and so the only way this can be paid would be to sell some of the farm, which in turn will make the farm unviable as a commercial enterprise.  If the stated intention is for the vast majority of farms to be unaffected and the working farmer is not the target for these reforms then it is simple for the Prime Minister to adjust his sights and support British farmers, rural businesses and food security.  Put simply, the bar has been set too low and will discourage much needed investment in a multitude of businesses, not just farming.  

We set out the highlights below:

• From 6 April 2026, 100% APR and BPR will be capped at £1m per person.  
• The rate of relief on the balance will effectively be halved - i.e. IHT will apply at 20%.  As noted above, this could threaten the viability of many businesses if there is an untimely death.  Prior to the changes, businesses, including farming businesses, were encouraged to invest but now face the rug being pulled from underneath them if a family member dies.
• The £1m allowance will not be transferable between spouses on death and so, in addition to ensuring that each spouse has sufficient value in their name on death, their Will needs to carve out a legacy of this amount.  Families will need to review ownership structures to maximise the availability of these thresholds - we are back to the days of 'use it or lose it'.
• Trusts established before 30 October 2024 may have a £1m allowance each and will be treated more favourably than trusts set up after 30 October 2024, which will share a combined £1m allowance.  Retaining existing trusts may therefore be beneficial.  As noted above, there will be a technical consultation on the application of the new rules for trusts in early 2025.
• It is anticipated that transfers into trust or gifts before 30 October 2024 will also be treated more favourably; if there is a death within 7 years of the transfer, IHT relief at the current rate should continue to be available.  Given the significance of the changes, the Government should consider a transitional window during which the 'old rules' apply which would at least give farmers an opportunity to plan.
• The £1m allowance will apply to the combined value of property in an estate qualifying for 100% APR and BPR and, in the event that the allowance is exceeded, will be allocated to BPR qualifying property and APR qualifying property proportionately (in contrast to the current rules pursuant to which APR applies in priority).
• IHT liabilities that relate to agricultural and business property can currently be paid in 10 equal annual instalments which we understand will remain the case.  However, for many farming businesses, funding this charge, even on an instalment basis, may only be possible through a sale of some or part of their business.
• The Government has confirmed, as expected and following its 2023 consultation, that APR will be available to businesses and landowners participating in Environmental Land Management Schemes, which has been long awaited.

Comments and planning considerations

• Pre-Budget speculation that there may be changes to the 7-year rule did not materialise.   Gifting to the next generation therefore remains an option but rules will be introduced so that IHT will apply under the new rules where the donor dies within 7 years of a gift and after 6 April 2026.
• If gifting is to be considered, capital gains tax may be a barrier.  For gifts of agricultural property, this should not be an issue as holdover relief should allow any gain to be deferred.  However, where there is a gift of a business, a higher 'substantial' trading test applies and so if a business does not satisfy an 80% trading test, CGT may be payable.  In this situation, the business may need to be restructured to qualify, or a trust may form part of the planning (as gains can generally be held over on a transfer into trust).
• The Government did not make any changes to the CGT uplift in the base cost of assets on death, the general rule being that you should not pay IHT and CGT on the same event.  There had been concerns that this could change where a farm or business is exempt from IHT because of APR or BPR applying.
• Wills should be reviewed before April 2026 where they have been structured to 'bank' reliefs for APR or BPR purposes to ensure that business and agricultural property is dealt with appropriately, and to ensure that use is made of the £1m allowances for each individual in a marriage.
• Farming and business structures that benefit from APR/BPR under the current rules will need to be reviewed.  For example, where  a business includes trading and investment activities it may benefit from BPR on the whole value of the business.  Relief will now effectively be halved.
• Trust structures will benefit from their own £1m allowance and so may be valuable structures to retain.
• The way in which IHT is funded will need to be considered.  If a business is able to build up funds to pay an IHT charge, would that be considered as part of the business and so qualify for relief at 50% with the remaining 50% being taxed?  One would hope it would not be regarded as an 'excepted' asset so that it is fully taxed when it is being set aside precisely for the needs of the business.  
• Having spent the last 25 years trying to simplify farming and business structures, there is a concern that we may return to the days of complicated structures to fragment value simply to mitigate the impact of these changes.  One hopes that during the consultation process the current Government will consider the impact that the proposed changes will have, not just on farming business and for issues such as food security, but on all owner managed businesses up and down the country.  The harm that these changes will cause will outweigh the benefits.  At the very least, it should be acknowledged that if a change can be supported on ideological grounds, the bar has been set too low and the result is one of unintended consequences.

Next steps

The above are just a few of the considerations on these reforms and we will be updating this, once further detail is put forward by the Government. Should you wish to discuss the changes and how they affect you and your family, please do get in touch.