Agricultural and Business Property Reliefs – Navigating the 2024 Reforms:
The October budget introduced significant reforms to Inheritance Tax, particularly Agricultural Property Relief and Business Property Relief. At the moment, qualifying agricultural and business assets benefit from 100% or 50% relief, making estate planning more manageable for families.
However, new rules will take effect on 6 April 2026, potentially increasing inheritance tax liabilities and sparking concern among property and business owners. Understanding these changes is essential to protecting your assets and planning for the future.
Understanding agricultural property relief
Agricultural property relief is a tax break related to inheritance tax on the transfer of agricultural property. Depending on the type of agricultural property, the relief will either be 100% or 50%, with no upper limit with pre-2026 regulations. This has proved helpful in handing down agricultural assets to ensure that farms and agricultural businesses remain in the family.
The specific criteria for types of agricultural property which would qualify for 100% relief under the pre-2026 regulations are as follows:-
- Property where the owner has the right of vacant possession or can obtain vacant possession within 24 months
- Property let in a tenancy that began on or after 1 September 1995
- Land let on a tenancy that started prior to 1 September 1995 and where the owner became beneficially entitled to the land before 10 March 1981
- Owner-occupied property must have been occupied by the owner, company or family/spouse for at least 2 years.
- Property occupied by someone else must have been owned for seven years and occupied for the purposes of agriculture.
The criteria for agricultural property which would qualify for 50% relief are as follows:-
- Land let on a tenancy which began before 1 September 1995 and where they only became beneficially entitled to the land after 10 March 1981
- Land let under an arrangement which does not allow the owner vacant possession within 24 months
For reference, the definition of agricultural property is relatively broad and takes in:-
- Land used to grow crops
- Property used for stud farming
- Trees planted and harvested every 10 years
- Land not currently being farmed under habitat/crop rotation schemes
- The value of milk quotas associated with the land
- Some agricultural shares and securities
- Farm buildings, cottages and farmhouses
In recent years, many farms have introduced additional income streams which unfortunately fall outside of the definition of agricultural property, such as:-
- Windfarms
- Commercial woodland
- Commercial letting of cottages/barns
- Entertainment events
- Farm contracting services
The result of agricultural property relief meant that assets which qualified were exempt from your estate and, therefore, from inheritance tax. Where the exemption was just 50%, the value of the assets will be added to your estate, and if you are liable for inheritance tax, this would be charged at half the normal rate, i.e., 20%.
Changes to agricultural property relief
With effect from 6 April 2026, those qualifying for 100% relief will be restricted to the first £1 million of combined agricultural and business property. Depending on the size of the broader estate, any inheritance tax on the balance above £1 million would be reduced by 50%, i.e. a rate of 20% rather than 40%. In line with IHT liabilities, there is the option to pay any tax liability via interest-free instalments over a 10-year period.
One of the main problems is that many agricultural businesses are asset-rich and often cash-poor, with limited profitability. Under the new regulations, next-generation farmers may be forced to sell part of their land or assets to cover future inheritance tax liabilities. An ongoing increase in the value of land has further complicated this situation.
There is still the option to transfer assets to your spouse, tax-free on your death, but for many, this will simply create further problems later in life.
Understanding business property relief
Similar to the passing of agricultural businesses to the next generation, business property relief has been critical for many family businesses. Theoretically, business property relief is available for business property anywhere in the world that might typically fall within your inheritance tax net.
In a similar fashion to agricultural property relief, dependent on the type of asset, it may be eligible for 100% or 50% relief on inheritance tax. Under the old regulations, the following assets would receive 100% relief against any potential inheritance tax liability:-
- Trading business/interest in a trading business
- Holding shares in an unquoted company
- EIS investments
Criteria for a 50% reduction on the inheritance tax rate would apply to the following assets:-
- A controlling stake of more than 50% in a quoted company
- Land, buildings, machinery and plant used mainly for the activities carried out by a company/partnership
In order to put the broader concept into perspective, business relief is not available for:-
- Investment businesses
- Excepted assets
- Businesses subject to a contract for sale
The ownership condition for business relief is a minimum ownership period of two years. Where passed to a surviving spouse, their ownership period is deemed to have started when the deceased acquired the asset.
Changes to business property relief
Similarly to the agricultural property relief, the first £1 million of assets will still receive 100% relief against inheritance tax. Assets over £1 million will be deemed to be part of the deceased’s estate, and, where liable to inheritance tax, there will be a 50% reduction, i.e. an inheritance tax rate of 20% rather than 40%.
Where the deceased held shares that were not listed on a recognised stock exchange, e.g. the AIM market, they will form part of their estate but would be subject to 50% relief against inheritance tax. This asset will not count towards the £1 million allowance, which qualifies for 100% relief.
Implications of the reforms
Before we look at the implications in more detail, it’s essential to recognise that the government brought in forestalling regulations on 30 October 2024. This means that for lifetime transfers on or after this date, if the donor dies on or after 6 April 2026, the new relief rules apply. If the donor dies within seven years of the transfer, this would be a failed, potentially exempt transfer and fall under the rules of the new agricultural and business property relief regulations. This is where it starts to get complicated!
There is controversy and significant disagreement between the Treasury and farming bodies concerning the estimated number of farms which the change in regulations could impact. The government claims that just 27% of farms will be impacted, but the National Farmers Union believes this will affect nearly 75% of commercial farms. The three main areas of contention are as follows:-
- Not all agricultural property relief claims relate to working farms
- The data used by the government was from the tax year 2021/22
- Land prices have increased significantly since 2021/22
- The impact on farms claiming both sets of relief has not been taken into account
To put this into perspective, the average return on capital employed between the 2018/19 and 2022/23 tax years has been as follows:-
- Small farms -0.6%
- Medium-sized farms +0.4%
- Large farms +2%
- Cereal farms +1.5%
- Crop farms +1.5%
- Dairy farms +1.8%
When different types of farms were considered, the average return was just 0.2%, which would appear to leave little scope for paying any inheritance tax liability without selling assets.
Strategies for navigating the new landscape
Even though the new regulations do not come in until April 2026, the move to prevent forestalling means those potentially impacted by changes to the property reliefs must start making plans now. While there may be similarities between the structures of many farming businesses across the UK, it’s vital to obtain personalised advice for your broader situation when it comes to estate planning.
There are many different issues to take into consideration, such as:-
- Reassessing asset ownership structures
- Maximising eligible APR/BPR
- Diversifying existing holdings
- Succession planning
- Liquidity planning
As we mentioned earlier, this can have significant repercussions with many farms and businesses asset-rich and potentially cash-poor. Post the budget, we have heard rumours and counter-rumours regarding restrictions on transferring traditional IHT allowances between spouses. Consequently, you must take advice from a tax expert who knows the current regulations and incoming changes.
HMRC Agricultural property relief -Conclusion
Unfortunately, it seems that a significant number of farms and businesses will suffer as a consequence of changes to agricultural and business property relief. It’s essential to adjust your estate management plans and consider the incoming regulations as soon as possible. We have a team of tax experts available to discuss your situation in more detail, identify the options, and propose the most appropriate actions for you.
Please feel free to call us at any time. We can review your situation and discuss ways to mitigate any potential tax liability in the future.