Inheritance Tax changes to impact family-run farms
Members of the agricultural sector haven’t held back on their criticism of 30 October’s Budget statement from the UK Government, with widespread concern from many farmers that selling up now may be preferential to a hefty inheritance tax bill later for their children.
From April 2026, agricultural and business assets worth over £1m that are inherited will no longer fully benefit from reliefs which could effectively exempt them from Inheritance Tax (IHT) and will instead be susceptible to an effective rate of 20% (due to reliefs being restricted to 50% of the value in excess of the first £1m).
If we look at the potential monetary impact of this announcement, it could make a significant difference:
Example assets (all held jointly between spouses, but passing to each other on first death)
- a 500-acre family farm
- land and farm buildings valued at £6m
- the farmhouse valued at £500,000
- cash savings of £100,000
Tax situation under current rules
Asset | Value | Relief applied | Taxable amount |
Land and buildings | £6,000,000 | 100% APR/BPR (Full Relief) | £0 |
Farmhouse | £500,000 | None | £500,000 |
Cash | £100,000 | None | £100,000 |
Total estate | £6,600,000 | £600,000 | |
Nil rate band applied | £650,000 | £0 |
Outcome: No IHT liability (taxable estate = £0)
Change from April 2026
Asset | Value | Relief applied | Taxable amount |
Land and buildings | £6,000,000 | £1,000,000 @ 100% relief | £0 |
£5,000,000 @ 50% relief | £2,500,000 | ||
Farmhouse | £500,000 | None | £500,000 |
Cash | £100,000 | None | £100,000 |
Total estate | £6,600,000 | £3,100,000 | |
Nil rate band applied | £650,000 | £2,450,000 |
Outcome:
- Taxable estate (after deducting the nil rate bands): £2,450,000.
- IHT liability: 40% of £2,450,000 = £980,000.
Not only is this a significant difference, but only having £100,000 of cash would likely mean that the house or some of the farm would have to be sold to pay the liability. HMRC has stated that the tax owed following the changes can be paid over 10 years interest free, although this may not be much of a consolation for those impacted.
What to consider
For those with assets in excess of the £1m allowance, the initial thinking may be to sell land or borrow funds to pay the IHT bill, but there are other considerations beyond this as a means of mitigating the impact:
- A back to basics understanding of the business structure and land ownership so that there’s an awareness of where tax reliefs may apply.
- Review of partnership agreement and wills so that there’s appropriate passing on of assets upon death and allowances are maximised.
- Lifetime gifting rather than on death as a means of reducing an IHT bill.
- Similarly, strategic gifting – e.g. gifting core parts of a farm
- Utilising the joint interest in land rules effectively
- Use of trusts to support tax efficiency
We are here to help
If you are operating in the agricultural sector and have concerns about how to deal with the inheritance tax changes or challenges generally, please get in touch with accountants specialising in agriculture or your usual Azets advisor.
The information contained within this insight is for guidance only and does not constitute advice which should be sought before taking any action or inaction.
