The Budget Announcements delivered by the Chancellor Rachel Reeves will have a significant impact on succession planning for rural businesses writes Alex Docherty, head of private client tax at Johnston Carmichael
Up until now, farmers could die holding their farm business and up to 100% Inheritance Tax relief could be available on death. Going forward from 6 April 2026, changes will be introduced to the rate of Agricultural Property Relief (APR) & Business Property Relief (BPR) when assets exceed a certain value.
Whilst there were some positive announcements on 30 October for rural business, which we touch on later, on the whole it was a rollercoaster of a day for the sector and the after effects will be felt over future years. The key changes coming into plare are:
APR and BPR reform
The far-reaching change of the day was in relation to APR and BPR. From 6 April 2026 there will be a combined allowance for both reliefs of £1m relieved at a 100% rate (subject to the relevant conditions for the reliefs being met). Any value related to the business over and above £1m will receive a maximum 50% relief.
The Chancellor advised that this new approach to the rules should protect “small farms”, however given the value of land, livestock, and machinery, and the average size of a commercial farm being around 200 acres, then these changes are likely to see a significant number of farm businesses brought within the scope of IHT.
For instance, if someone dies after 6 April 2026 owning a an IHT qualifying farm with a value of £4m, then £1m will be relieved at 100% relief, the remaining £3m will receive 50% relief, seeing £1.5m subject to IHT at a 40% rate. This would result in this example in a £600k IHT bill, required to be settled to HMRC. Although the payments can be spread over 10 years, the first £60k will require to be paid within 6 months of death.
The relief currently proposed is also not transferrable, so if it’s not used on first death, perhaps due to the Will leaving assets to the surviving spouse and so spouse exemption in point, the relief of the £1m at 100% cannot be transferred as such to the surviving spouse. Surviving spouse therefore has only £1m on death at 100% relief and the remaining value of the farm banks 50% relief.
Going forward, farming families will need to weigh up passing on the farm to the next generation in lifetime versus the IHT impact of continuing to own the farm on death. The anti-forestalling measures introduced in the budget also need to be considered now when structuring any farm transfers in lifetime. The new rules will apply for lifetime transfers on, or after 30 October 2024, where the individual making the gift subsequently dies on or after 6 April 2026 and within 7 years of the gift. Care should therefore be taken in considering who makes any gift. Transfers between spouses prior to a transfer of a farming interest to the next generation may be an option to consider if the owner of the land is currently less likely to survive the gift by 7 years.
Some individuals may be concerned around the 7 year survival requirement and so life cover can be considered (if viable). In essence an individual could look to take out an insurance product to cover the potential IHT which could come into charge either on the gift they’ve made (if they don’t survive the gift by 7 years) or if they were to die holding the business assets. For the latter whole of life cover could be considered. Of course, these policies cost and in addition if any health issues then it may not be possible to insure. Investment advice should also be taken if entering into such an arrangement. Farmers no matter how young now, if holding farming assets, may wish to consider some form of insurance product to best protect against unexpected death in the family.
Once 7 years has elapsed from the date of the gift, then the value of the farm will fall outside of the death estate for IHT purposes. Care will however require to be taken to ensure the tax anti-avoidance Gift with Reservation of Benefit rules do not apply, otherwise the gift from an IHT perspective could be ineffective.
The residence nil rate band of £175,000 per individual is retained and may assist in taking value out of an individual’s estate that would otherwise be subject to IHT on death. However, this is only available for estates passing on the main home to direct descendants and is withdrawn by £1 for every £2 where the value of the estate (before IHT reliefs such as APR and BPR) exceeds £2m.
Impact on Trusts
The use of trusts in family tax planning should not be overlooked and may be a favoured option over the outright gift in some cases. The £1m allowance will also apply to trusts, yet care should be taken as the value of the trust is reassessed for IHT purposes every 10 years. The maximum IHT rate here is only 6%, but the IHT rates and relief applicable at that time would be in point and there could be an IHT charge arising on the 10 year anniversary where APR and BPR are restricted to 50% relief on value in excess of £1m.
Those with farmland in trust at present should consider if there is an upcoming 10 year anniversary charge and if there is merit in the trust continuing, or whether assets should be extracted prior to that charge.
Inheritance Tax
Inheritance Tax (IHT) is a tax usually paid on death at 40% on the value of assets which are not covered by reliefs and exemptions. The nil rate band, which provides for part of the estate to be free from IHT, is frozen at £325,000 until 2030. Inevitably, assuming property values continue to rise, this may bring more estates into IHT.
APR and Environmental Land Management Agreements
The Chancellor announced a relaxation to the scope of APR from 6 April 2025 on approved environmental land management schemes will go ahead as planned by previous Government.
This measure was brought in to protect landowners and ensure they can obtain APR even if their tenant is keeping the land out of agricultural use, provided it is being used for approved environmental land management schemes.
Whilst this is welcome news, the other wide scale changes made to the level of APR and BPR available from 6 April 2026 deals a harder blow to the sector than this relaxation that was granted.
Capital Gains Tax rates
Not only were major changes announced to IHT but also to Capital Gains Tax (CGT). One major change, which applies with immediate effect, i.e. for disposals on or after 30 October 2024, was the increase to the CGT rates for the disposal of assets other than residential property. In effect, these are aligned with the rates for residential property, an increase from 10% to 18% for gains within the basic rate band and from 20% to 24% for gains arising to higher rate taxpayers.
For those who are at the closing stages of selling assets (other than residential property), this will be a significant increase and unexpected cost.
Whilst the aligning of the rates with the higher residential CGT rates may simplify the position in terms of offsetting losses and the annual exemption, it will still be necessary to determine the residential element of gains as the residential gains will continue to be reported, as well as the CGT paid on these within 60 days of the completion of the disposal.
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
For farmers who have not already used their lifetime business asset disposal relief (BADR) of £1m of qualifying gains, then this relief has been given a further lifeline.
The rate charged on qualifying disposals, such as a sale of a farming business, can still bank the 10% BADR relief. This rate remains at 10% until 5 April 2025, thereafter the rate increases to 14% until 5 April 2026 when it increases to 18%.
Anti-forestalling measures are introduced via draft legislation to prevent individuals entering into unconditional contracts with a view to banking the lower rate of 10%.
For those looking to sell the farm in the near future and benefit from BADR, securing a sale prior to 6 April 2025 will allow the sale at the lower 10% rate, subject to the £1m lifetime limit.
It is worthwhile noting that the rules for BADR are complex, and farmers can be caught out if the availability of BADR is not considered in advance and disposals need to take place in the right order as the rules differ for assets owned personally or as a partnership asset.
Other budget changes impacting the rural sector
Double cab pickups – U turn
From 1 April 2025 for Corporation Tax, and 6 April 2025 for income tax, Double Cab Pick Ups (DCPUs) will be treated as cars for the purposes of capital allowances, benefits in kind, and some deductions from business profits. The existing capital allowances treatment will apply to DCPUs purchased before April 2025 which, where applicable, would allow a 100% Annual Investment Allowance deduction and so full tax relief in the year the DCPU was acquired. DCPUs purchased after 1/6 April 2025 will be treated as cars and therefore writing down allowances of 6%/18%, based on CO2 emissions of the vehicle will apply, and tax relief for the purchase will be spread over a much longer period.
Transitional benefit in kind arrangements will apply for employers who have purchased, leased, or ordered a DCPU before 6 April 2025. They will be able to use the previous treatment, until the earlier of disposal, lease expiry, or 5 April 2029.
Employer’s national insurance increases
For farming businesses employing staff salary costs will increase from 6 April 2025. The employer’s national insurance rate will also increase from 13.8% to 15%. In addition, the employment income threshold at which that kicks in has been reduced from £9,100 to £5,000, impacting on the overall costs of employing staff.
Summary
All in all there has been significant change announced, in particular to IHT. This leaves many family businesses in an unknown space, not knowing how best to manage succession of the business in an organised fashion, whilst still protecting against the exposure of a punitive IHT charge on death which could lead to the break up of the family farm.
Do speak with your advisor before undertaking any changes. It will be important to consider, the commercial, legal and tax implications of any decisions in the round.
In addition, there may still be scope for the Government to row back some of these changes prior to 6 April 2026 and it will be important for the sector to get together to put forward a strong case evidencing the damaging impact of these IHT proposals.
The rural team at Johnston Carmichael are also on hand should anyone want to discuss any of this in more detail.
www.jcca.co.uk
- NFU Scotland Tax Helpline. NFU Scotland members are entitled to 20 minutes FREE advice from our dedicated helpline, operated by Johnston Carmichael. Please call Freephone 0800 023 2368 to access help and please have your membership number to hand.
- Johnston Carmichael is holding a Budget implications webinar – What You Need To Know on Tuesday 5 November at 12.00 noon. The Zoom meeting will be addressed by taxation specialists Alex Docherty, David Ward and John McAuslin. Register for your place at: https://us02web.zoom.us/webinar/register/1717290761964/WN_degThu0CRlKKnADS__psOw#/registration