How is the change in Inheritance tax in the budget dated 30.10.2024 going to impact farmers?

How is the change in Inheritance tax in the budget dated 30.10.2024 going to impact farmers?

·         With effect from 6th April 2026 there will be reductions in Agricultural Property Relief (APR) and Business Property Relief (BPR) : the first £1 million of such assets will remain tax-free, after that APR and BPR will only apply to 50% of qualifying business and agricultural assets, and  Inheritance tax will be applied at a rate of  20%  beyond that, including on Aim shares and any shares not listed on markets of recognised stock exchanges. At present APR is available at 100% on the agricultural value provided that the asset could only be used for agricultural use in perpetuity. This valuable relief is in recognition of the importance of agricultural farms to our society.

·         So under the new rules, if your parents or relatives own a farm worth more than £1 million which they are leaving you in their wills then you are going to have to pay 20% on half any assets over that (after deduction of any available nil rate band) which qualify for APR and BPR ( in addition to the 40% Inheritance tax which will apply to assets which do not qualify for APR and BPR over the available nil rate bands). APR does not apply to farm equipment and machinery, derelict buildings, harvested crops, livestock or property subject to a binding contract for sale. To qualify for the relief, a property must be part of a working farm in the UK. It can be owner occupied or let. The property must have been owned and occupied for agricultural purposes for 2 years if occupied by the owner, a company controlled by them or their spouse/civil partner. If not occupied by the owner or spouse or Company controlled by them ( ie if it is rented), the property must have been occupied for 7 years.

·         The number of farms that could possibly ever  be affected by this change is said to be  up to 70,000 according to the Country and Land and Business Association, but according to the Treasury the number of farms likely to be impacted each year by the reduction APR is likely to be around 500 . These Treasury numbers are based on the number of farms valued at over £1 million. Land prices mean that farms over 200 acres (81 hectares) in size are likely to be affected. In 2023 the average value of arable land was £9272 per acre and the average value of pastureland was £7511 per acre. There are 191,000 farms in the UK according to Wikipedia

·         These inherited farms will also benefit from the nil rate band of £325,000 per owner, on top of the first £1 million which will be exempted from Inheritance tax per person. So if a farmer is married, his or her spouse would still also be able to pass on another £1.325m tax free, taking the total untaxed amount to £2.65 million. Residence nil rate band is unaffected, but of course this does not apply to estates valued at more than £2.35 million so will not be of any benefit to the estate.

·         In 2021-22 there were 80 inherited farms valued at between £2.5m and £5m and 37 inherited farms valued at above £5m. So only the richest estates will be asked to pay according to Steve Reed, the secretary of state for the environment, food and rural affairs. But the truth is that any farm owned by a married couple worth more than £2.65 million (including gifts made during the previous 7 years) will be caught by this “family farm tax” (the name given to it by the National Farmers Union).

·         How will this affect the farming community? Even though the official line is that only 117 farms per year will be affected, this is still significant for those farmers families who are facing an Inheritance tax bill; Grant of Probate will not be made until the tax is paid, forcing the beneficiaries to either borrow at high rates of interest or sell land or buildings to pay the tax. Over time this is likely to lead to some farms becoming smaller and more fragmented, or eventually being broken up completely, at which point they become financially unviable for agriculture. The average yield of arable land is only £1,216 per hectare (Defra 2021 figures based on 3.7m hectares generating £4.5 bn)  so a farmer cannot reduce the amount of land he/she farms without affecting his/her profits. 65% of UK farms had already  been forced to diversify in 2003 (according to a study commissioned by DEFRA) and making the land pay is already extremely challenging for everybody . The National Farmers Union (NFU) have said that the changes will undermine viable farming businesses even further. They are organising a mass lobbying of MPs on 19th November to protest against this change and the hike in the employer’s National Insurance rates on farmers. The farmers are by all accounts very angry, and it remains to be seen whether the government will back down in the face of popular protest.

·         How can farmers avoid this tax?  By gifting agricultural property or land during their lifetime; normally, a gift of property is subject to capital gains tax (CGT) which is charged on any profit arising, or treated as arising on the gift. However a farmer is permitted to gift land which qualifies for APR to a donee, eg the next generation,  without liability to capital gains tax being incurred. The gain treated as arising on a gift can be “held over” to the transferee, so that the transferee takes the land at the transferor’s original cost price. Provided the farmer donor lives 7 years and does not benefit from the gifted land ( which would be considered reservation of benefits and so invalidate the gift), then no Inheritance tax will be due on the gift either, but if he dies before 7 years then Inheritance tax will be payable, subject to some reduction for taper relief.  Before this happens a farmer will need to have an accurate idea of how much his land and assets are worth so he can begin to plan. Every farmer should be encouraged to carry out a careful inventory on a regular basis so he is aware of any potential future tax liabilities and threat to him passing the land down to his family. Generally the donor and donee will not have to pay Stamp Duty Land Tax (SDLT) if there is no consideration and no outstanding mortgage or loan on the property.

·         A Farmer may also be able to avoid this tax by transferring assets within his ownership into trust ( and not necessarily assets which qualify for APR and BPR- these may best be left in his estate in order to benefit from APR and BPR ): assuming a discretionary trust is used, then provided that the value of the assets transferred does not exceed the available nil rate band (£325,000 less any gifts made during the previous 7 years) then no Inheritance tax will be due and any capital gain in value will be held over to the trust and taxable upon the trustees when they dispose of the asset. However Stamp Duty Land Tax will be payable as the ownership of the asset would pass to the Trust and Legal Fees will also be incurred as a formal trust document will be required.

·         This can be repeated every 7 years (provided no gifts are made in the meantime) as the nil rate band renews itself after 7 years. So a farmer and any spouse may well need to start giving their land away to the next generation or transferring it into trust well in advance of their deaths, and it may not be possible to avoid exposure to Inheritance Tax completely. Getting an expert valuation of your farm and assets is therefore an important step to take early on in your farming career so you can plan as efficiently as the law allows.

·         Any shortfall in Inheritance Tax planning can be filled by Whole of Life Assurance; this is an assurance policy which pays out the amount of Inheritance tax predicted to be due on the second death of the farmer or his wife, but the premiums must continue to be paid right up until second death otherwise the policy will lapse and the investment wasted. This may be too costly for most farmers, whose incomes and accessible capital  are usually  modest.

·         To summarise the likely impact of these tax changes, some farmers are likely to be forced out of business because it will no longer be financially viable for them to go on. At a time where our country only manages to produce 54% of its own food, this is a regrettable and disincentivising step. It sends the wrong signal to farmers generally at a time when we should be promoting, encouraging and rewarding them for good practice and farm management.

·         This article does not constitute financial advice and should not be taken as such. It is based on our interpretation of the new rules and specialist advice should be sought if you think you will be effected.

·         Russell Blackhurst Llb Dip Pfs is an Independent Financial Adviser with Lazenby’s financial services in Leeds, telephone 0113 322 0700. Our website is www.lazenbysfs.co.uk    . We would be happy to have a chat with you in order to talk through any questions or concerns you may have.