Practical steps to mitigate agricultural Autumn Budget

There’s no getting away from the fact that these are huge changes, which are going to cause a lot of heartache. The important thing is not to panic: Take stock, ensure your accountant has a thorough understanding of asset values and ownership, and make a plan.

The headline change is that agricultural and business assets will only qualify for 100% relief up to a cap of £1m per person (over and above the nil-rate band, which is tax-free up to £325,000 per person, or up to £500,000 where eligible for the residence nil rate band as well). Above the £1m cap, relief on eligible assets will apply at a rate of 50%, meaning effectively Inheritance Tax (IHT) will be levied at 20%.

So, for an individual owning a farm worth £3m, the first £1m of that will be covered by Agricultural Property Relief (APR) of 100% so tax-free. The remaining £2m will be covered by 50% APR so also tax-free, leaving £1m still taxable. The farmer then has a nil rate band (NRB) of £325k leaving a final taxable estate of £675,000. Their Inheritance Tax (IHT) exposure is then calculated as £675,000 x 40% incurring a final tax bill of £270,000.

“It’s important to remember that the £1m eligible for APR / BPR is not just land – it’s all the working assets, including livestock and machinery,” says Mr Kirkpatrick. “So that can very quickly be taken up.” However, the cost of any loans or mortgages secured against the property could be deductible.

The changes only take effect for deaths after 5 April 2026 – so any inheritance triggered by death before that date will be subject to the existing, unlimited APR / BPR rules. “However, even then, check the reliefs available; don’t take them for granted.”

Those whose estates will be subject to large tax bills on death will have to decide what to do about it: Spread the ownership of assets among family members to maximise the reliefs available, sell land to fund the tax bill, or borrow money to pay the tax bill. “Borrowing money to service that debt will put a considerable strain on a farm business,” explains Mr Kirkpatrick. “I think there will be a lot more land coming to the market.”

The most sensible option to mitigate tax bills is to spread assets around the family. The £1m APR / BPR allowance does not pass automatically to a spouse, so the first thing is to ensure that both spouses are making the most of their allowances. “You can pass assets onto a spouse without any tax being incurred.”

Landowners can also pass assets on free of IHT, provided they survive seven years from the date of the gift. For any gifts made before the day of the Budget (30 October), there is no cap on the value or tax-free element of the gift. But gifts made from 30 October onwards will count towards the £1m cap – should the landowner die within seven years, the gift falls within that cap. If they survive more than seven years, the gift should fall outside the scope of IHT.

“These changes are going to encourage people to hand on assets much earlier in life, which probably isn’t a bad thing for the industry. However, how the Government has chosen to do this is going to hurt some families – particularly those suffering unexpected deaths,” says Mr Kirkpatrick. “And early inheritance won’t suit everyone – each family and business situation is different, and the day-to-day implications must be considered, not just the tax benefits.”

One option which is likely to see significant uptake is life insurance, to cover the potential cost of IHT bills. “If you’re making gifts and are concerned you could die within the seven- year window, you might take out insurance to cover the potential tax, just for that period; it could be an affordable solution.”

When restructuring asset ownership, it’s also important to consider Capital Gains Tax (CGT) implications, he warns. While gifts to spouses are tax-free, other gifts are liable to CGT, at 18% (basic rate taxpayers) or 24% (higher rate taxpayers). Holdover relief is one option, to defer the tax liability, and if it’s the donor’s main house, principal private residence relief can be available.

If it’s a more comprehensive business restructure or sale, business asset disposal relief (BADR – formerly entrepreneur’s relief) may apply on gains up to £1m per person. Currently levied at 10% tax, BADR will increase to 14% from April 2025 and 18% from April 2026.

In terms of the wider effects of these changes, Mr Kirkpatrick envisages considerable uncertainty for tenant farmers and the overall land market. “Landlords letting land only qualify for the £1m APR / BPR allowance, so on death we could see parts of estates sold off to pay the tax. And the investment case for non-farmers to buy land has got worse. This may end up being a positive for the industry, however it will certainly cause some upheaval over the next few years.”

Pension funds – pending a consultation – are also expected to fall within the estate from April 2027, and will therefore be subject to tax on death. And those who are looking at passing assets down to the next generation will need to consider what assets they retain for their own financial security over the course of their life.

“Every business and situation is different. But what’s critical now is not to bury your head in the sand. Take stock. Work with your accountant and trusted professionals, and don’t rely on any tax planning or Wills that have been done in the past without checking it still stacks up. There is no substitute for careful planning for the future, now more than ever.”

If you would like to discuss the Budget in more detail, then please do get in touch.

Source: Olivia Cooper, AgriHub