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Inheritance tax – what has changed for farmers and business owners?

23 January 2025

A farmer and their son

Last year’s autumn budget brought changes to inheritance tax (“IHT”) for farmers, which are due to come into effect from 6 April 2026.

Before the budget, most farmers were able to pass their farming assets on free of IHT with the use of Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”). The significant changes, which were announced within the Budget, alters this position.

From 6 April 2026, each taxpayer will have a combined APR and BPR allowance of £1m to offset against their farming and business assets. Any assets that qualify for APR and BPR that are above the value of £1m will receive 50% relief therefore, an effective rate of 20% tax will apply to these assets over £1m.

Careful tax planning is now required to ensure each farm owner utilises their APR and BPR £1m allowance as this applies per person and not per farm. When looking at a husband and wife farming scenario, if on first death ‘Mr Smith’ leaves all of his assets to his wife ‘Mrs Smith’, the APR and BPR £1m allowance would be lost, as when ‘Mrs Smith’ dies she would only have her own £1m allowance.

Planning is needed here to see whether when ‘Mr Smith’ dies, he could instead leave £1m APR or BRP assets to his children on his death, or into a trust. The effect of this would mean that £2m could pass to the next generation tax-free.

IHT can potentially be avoided by making lifetime gifts. In order for an asset to be outside of an estate for IHT purposes, the donor needs to survive seven years, and no benefit can be retained in the asset that has been gifted.

Disposing of assets, however, may trigger a Capital Gains Tax charge so this would need to be considered when looking at making a gift. Again, planning needs to be considered when looking at making gifts.

But what about business owners?

They are in a similar position; BPR will no longer be available to them in the same way. If a business owner has assets that qualify for BPR, previously they could have transferred their qualifying business assets to the next generation free of tax. From 6 April 2026, they will also only have the £1m relief available to them. As above, any assets over this amount will receive 50% relief, therefore, the effective rate of 20% tax.

Business owners are as affected as farmers and they also need to carefully plan to review their own IHT position.

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