Farms and IHT - what’s really happening?

APR and BPR

The Autumn Budget’s curtailment of inheritance tax (IHT) business and agricultural property reliefs (APR and BPR) has fuelled fears among farmers that when they pass their business to the next generation there will be a tax hit that has to be funded by selling farm assets. The government’s view is that the reliefs are often used as IHT shelters by wealthy individuals and that most working farms will be unaffected.

In black and white

Under the current rules the whole agricultural and business value of a farming activity is free from IHT. However, from 6 April 2026, full relief will be limited to the first £1m of value plus half the remainder. Note that currently and under the new rules an individual’s entitlement to APR/BPR cannot be transferred to their spouse or civil partner.

The APR/BPR restriction also applies to transfers made on or after 30 October 2024 if the transferor dies after 5 April 2026. However, if they survive at least seven years from making the transfer it becomes wholly exempt from IHT.

Any IHT due on the transfer of a farm business is payable by interest-free instalments over ten years.

How much tax?

Ignoring other assets a farmer might have, e.g. personal savings, including from April 2027 private pension funds, a single farmer can pass on a farm valued at up to £2m before IHT kicks in. Therefore, a farming couple, whether married (or in a civil partnership) or not will be able to pass on £4m worth of agricultural business IHT free (see The next step ).

Mitigating the IHT

An obvious planning tool is to divide ownership of farms during the lifetime of the current owners, instead of on death. This works as each part owner of the farm has their own entitlement to APR and BPR. This could include a lifetime gift of a share in the farm to the younger generation or taking children into partnership.

Again, as long as the transferor survives for seven years from the date of the gift, no IHT is payable. However, care is needed to avoid the gift with reservation of benefit rules, particularly in relation to the farmhouse. Any capital gains tax that results from the transfer can usually be deferred through gift relief.

To retain control and access another £1m APR/BPR allowance, gift assets into trust. This involves some tricky tax concepts and will require professional advice.

Where the existing owner is in ill health but their spouse is still fit, making an intervening spousal exempt transfer before a subsequent gift to descendants should maximise the chances of surviving the necessary seven years.