Briefing note – changes to inheritance tax and capital gains tax for farming clients

Inheritance tax

Before the October budget, most farmers were able to pass on their farm free of inheritance tax (“IHT), thanks to 100% Agricultural Property Relief (“APR”).

Business Property Relief (“BPR”) was used to cover non-agricultural value or diversified activities, as well as other assets in the business such as stock and machinery. A significant restriction of these reliefs was announced on 30 October 2024 to take effect from 6 April 2026. It remains to be seen if lobbying by the NFU and others will have an impact and whether there will be any significant changes to the current position.

From April 2026, 100% relief – both APR and BPR combined – will be available on the first £1m of value only, and 50% relief will apply to the rest – an effective 20% rate of tax. This “relief allowance” applies per person and not per farm, but careful planning is required to ensure the relief is fully used.

It is still possible to make lifetime gifts and, if the donor survives seven years and no benefit in the gifted assets is retained, the gift is outside inheritance tax. However, there are also anti-forestalling provisions regarding lifetime gifts. Gifts made after 30 October 2024 that fail – which means where the donor dies within seven years – after April 2026 will be subject to the new regime, rather than that in place at the date of the gift.

There is, therefore, a balance to be struck between taking action to pass assets on as soon as possible, and not reacting too hastily and forgetting other considerations like asset protection.

In addition to this relief allowance, it should be remembered that the usual Nil Rate Band, frozen at £325,000 per person until 2030, continues to apply. There is also an additional Residence Nil Rate Band at £175,000 per person, but this may be of little use to farmers as the tax-free allowance is reduced where the assets exceed £2m in value before the application of APR and BPR.

The government has stated that, with the application of the maximum Nil Rate Bands and the relief allowance, it is possible for a married couple to pass on a farm worth £3m tax-free. Whilst this is theoretically possible, the circumstances in which this scenario would apply are limited.

Finally, it was also announced that unspent pension funds will come into the inheritance tax charge from April 2027. The pension fund administrators will be responsible for calculating and paying IHT due within six months from the date of death. It has not yet been announced how pension funds owning agricultural land will be affected by the restriction of APR and whether the fund will have its own allowance or share that of the deceased member’s.

Example

Mr and Mrs Smith own and work their 500-acre farm with four-bedroomed farmhouse. The total value, for argument’s sake, is £5m. The IHT bill on death will be:

Pre-April 2026: Zero, assuming 100% APR on all, on both first and second death

Post-April 2026:

• If their wills are drafted so that on the first death everything is left to the survivor, on the second death there is an IHT bill of £540,000 – 10.8% asset value
• If the wills provide that, on first death, the £1m relief allowance is used, on the second death the IHT bill is reduced to £340,000 – 6.8% asset value.

However, careful lifetime planning and early lifetime gifting could get a farm of this size out of IHT for Mr and Mrs Smith, or at least reduce the tax bill to a more manageable level, but this needs be the right thing to do in context of all other considerations.

Capital gains tax

An increase in rates was announced from 10% to 18% for the basic rate and 20% to 24% for the higher rate, bringing the main rates into line with the residential property rates so there is no longer any distinction between the two.

Changes to Business Asset Disposal Relief were also announced, so this relief will become less generous from April 2025. Where the relief applies:

• Currently the effective rate of tax is 10%
• This will increase to 14% from April 2025, and then to 18% from April 2026
• All subject to the lifetime limit of £1m in gains.

Inheritance tax:

• The seven-year survival period for lifetime gifts remains – there were fears this could be increased
• Spouse exemption – transfers between spouses and civil partners in lifetime or on death are still IHT free, so there are planning opportunities
• There will be a technical consultation on the application of the new rules to trusts in Spring 2025, so there is a chance for views to be heard
• Land used for ELMS is coming into the scope of APR as planned in April 2025.

Capital gains tax

• Tax-free uplift on death remains – there has been previous speculation this could be abolished for relieved assets. The rationale for the tax-free uplift is that if assets are subject to IHT they should not also be subject to CGT at the same time. However, if no IHT is actually paid then this argument is weakened
• Holdover relief on gifts and rollover relief following sales were both unchanged.

Plenty of options remain in the lifetime planning toolkit, but investing in professional advice has never been more important.