Budget delivers heavy cut to farming's inheritance tax reliefs - Farmers Weekly

In this week's Budget, Chancellor Rachel Reeves has significantly reduced the beneficial inheritance tax exemptions for the farming sector. She has capped both the 100% relief on agricultural properties and the business property relief to only the first £1 million in value.

For amounts exceeding that limit, there will be a 50% reduction on eligible assets, resulting in an effective inheritance tax (IHT) rate of 20%.

Lawyer Ben Sharples, a partner at Michelmores, characterized the action as a significant setback to efforts aimed at preserving sustainable farming operations.

"An effective tax rate of 20% on any income over £1 million is considerably harsher than what many anticipated," he stated.

The decision has faced strong criticism from the National Farmers' Union (NFU), the Country Land and Business Association (CLA), and the Tenant Farmers Association (TFA), along with land agents and various agricultural advisors. They argue that it will lead to the fragmentation of family farms and hinder the United Kingdom's capacity to fulfill its environmental obligations.

Also check out: Last request for tax relief to Chancellor Reeves ahead of the budget announcement.

George Dunn, the CEO of TFA, is concerned about the future of rented properties. He believes that large private estates are at greater risk since they are more likely to exceed the £1 million threshold. This situation could result in a substantial number of property sales.

Tom Bradshaw, the president of the NFU, called it a catastrophic budget for family farmers, particularly those who rent their land.

Changes Coming In April 2026

The new regulations will come into force in April 2026, leading to a hectic year for tax and legal advisors. Families will be busy reorganizing their properties, farms, and other assets to meet the deadline.

Following that, it's anticipated that this action will prompt more land to be listed for sale to cover inheritance tax payments.

Chancellor Reeves mentioned that three-quarters of farms would not be impacted by the cuts in inheritance tax reliefs. However, the CLA countered by stating that around 70,000 farms would indeed feel the effects.

Nil Rate Bands Remain Unchanged

The £1 million limit will be added to the current tax-free allowances, and transfers between husbands and wives or civil partners will still be exempt from inheritance tax.

In addition to the £1 million relief limit, the personal nil-rate bands that determine when Inheritance Tax (IHT) comes into play will remain unchanged for another two years, extending until 2030.

This indicates that the initial £325,000 of any estate can still be passed on without incurring inheritance tax.

This amount increases to £500,000 when the estate includes a home that is inherited by direct descendants.

If a tax-free allowance is granted to a surviving spouse or civil partner, the limit increases to £1 million.

When you add the £1 million exemption introduced in the Budget, it could provide a total of £2 million in relief for numerous families.

As we wait for more information after the Budget speech, CAAV secretary Jeremy Moody stated, “It seems that a combinable cropping farm would be subject to a 20% tax on its value if it spans over approximately 100 acres.”

“Seventy-five percent of those making claims under the £1 million coverage are individuals with a garden or two, rather than actual farms.”

Mr. Moody stated, "This situation becomes even more vulnerable when there are buildings, important machinery, livestock, and various other possessions involved."

Peter Griffiths, the tax director at Hazlewoods, mentioned that the upcoming adjustments to agricultural property relief (APR) and business property relief, set to take effect in April 2026, will greatly affect farming businesses that are actively trading.

Documents issued following the Budget speech clarified that any financial transfers made to individuals over seven years before someone passes away will still be exempt from Inheritance Tax (IHT).

Mr. Griffiths stated, "If the rules for capital gains tax gift relief stay the same, we can expect to see a significant rise in the lifetime gifts that parents make to their farming children in order to sidestep inheritance tax."

APR For Eco-Friendly Land Management

The chancellor has announced that starting April 6, 2025, the current range of APR will be broadened to cover land that is part of environmental programs.

Mr. Sharples stated, "This validates the adjustments suggested by the former administration and acknowledges the evolving landscape of agricultural practices."

The range of assistance is extensive, covering standard agricultural support programs like ELM. It also includes land that is managed under environmental agreements with or for the UK government, regional governments, public organizations, local councils, or authorized responsible bodies. This support takes into account mandatory initiatives such as biodiversity net gain and nutrient neutrality.

"The updated regulations will implement an annual percentage rate (APR) of 100% for the initial £1 million, and then a rate of 50% for any amount beyond that."

Sarah Dodds, who leads the agriculture team at MHA, highlights that the capital gains tax (CGT) rates for non-residential properties, which are currently set at 10% and 20%, will now be adjusted to match the residential rates of 18% and 24%, and this change will take effect right away.

In the Budget, the government kept the relief from capital gains tax for the disposal of business assets.

This deduction can be applied to the initial £1 million of profit when a business is sold or otherwise transferred, currently reducing the effective Capital Gains Tax rate to 10%.

Despite the current relief limit remaining unchanged, the tax rate is set to increase to 14% starting in April 2026 and will further rise to 18% in 2027.