Farmers facing new inheritance tax rules have several options to mitigate the impact on their estates.
Following the Budget, valuable inheritance tax reliefs for agricultural and business assets will be removed, which will have a “devastating” impact on those affected.
From April 5 2026,agricultural and businesses assets will only qualify for 100 per cent 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 per cent, meaning effectively IHT will be levied at 20 per cent.
What this means is that for an individual owning a farm worth £3m, attracting a nil-rate band of £325,000, the first £325,000 is tax free, the next £1m qualifies for agricultural (APR) or business property relief (BPR) at 100 per cent, so remains tax free. The remaining £1.675m incurs a tax bill of £335,000.
Philip Kirkpatrick, director at rural accountant Old Mill said: “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.”
Following these changes, tens of thousands of farmers have descended on Westminster today in the largest protest against the Government’s inheritance tax changes.
The demonstration marks the biggest challenge Sir Keir Starmer has faced over domestic policy since taking office in July. The National Farmers’ Union (NFU) says the tax changes could force many family farms to be sold to pay tax bills.
Spread assets around the family
One key strategy to minimise liability is spreading assets among family members to maximise available reliefs.
Assets can be passed to spouses without incurring tax, ensuring both partners make full use of their allowances. Landowners can also pass assets on free of IHT if they survive seven years from the date of the gift. Gifts made from October 30 onwards will now count towards the £1m cap – should the landowner die within seven years, the gift falls within that cap.
Kirkpatrick said: “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.
“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.”
Consider life insurance
Life insurance is emerging as another viable solution, particularly for those concerned about dying within the seven-year gift window. “It could be an affordable solution,” Kirkpatrick added.
Capital Gains Tax implications
However, he warned that Capital Gains Tax implications must be considered when restructuring asset ownership. He said: “While gifts to spouses are tax-free, other gifts are liable to CGT, at 18 per cent (basic rate taxpayers) or 24 per cent (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 per cent tax, BADR will increase to 14 per cent from April 2025 and 18 per centfrom April 2026”
He predicts more farmland will come to market as families struggle with tax bills. He added: “Borrowing money to service that debt will put a considerable strain on a farm business.”
Pension funds expected to fall under IHT
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
Kirkpatrick emphasises the importance of not panicking but taking stock of the situation. He advises farmers to ensure their accountants have a thorough understanding of asset values and ownership.
He said: “Don’t take anything for granted,” noting that the £1m eligible for relief includes all working assets, from livestock to machinery.
The NFU claims the changes were implemented without any consultation from the farming community.
While Government figures suggest only 500 farm estates will be affected annually, the Liberal Democrats estimate up to 70,000 farms could be impacted.
Dan Neidle, independent tax expert suggests the number could be as low as 100 per year.
