The UK’s agricultural community is currently dealing with proposed reforms in inheritance tax laws, of which changes have sparked widespread concern, leading to significant demonstrations in London. Family farms, often cherished across generations, face potential financial challenges that could impact their legacy and operations.
In the recent budget announcement, the government proposed alterations to inheritance tax rules affecting Agricultural Property Relief (APR) and Business Property Relief (BPR).
Starting from April 2026, farms valued over £1 million may be subject to a 20% inheritance tax. While officials suggest that only a minority of farms will be impacted, industry experts and farming communities express concerns about the broader implications.
Key aspects of the proposed changes include:
(i) The tax-free threshold for farms is set at £1 million.
(ii) A flat rate of 20% inheritance tax will apply to the value exceeding the threshold.
The new rules are scheduled to come into effect in April 2026.
These changes aim to adjust the tax system to ensure fairness and address concerns about tax avoidance. However, many within the agricultural sector fear that the reforms may inadvertently affect family-run farms that are asset-rich but cash-poor.
How Will This Affect Farmers?
Family farms often represent generations of heritage and are integral to the UK’s rural economy. The proposed inheritance tax changes could place a substantial financial burden on these businesses.
Financial Implications
Many farms, even those considered modest in size, may exceed the £1 million threshold when accounting for land value, property, equipment, and livestock. The imposition of a 20% tax on the value above this threshold could result in significant liabilities.
For example:
A 200-acre farm: With agricultural land values averaging around £11,500 per acre, a 200-acre farm could be valued at £2.3 million.
After the £1 million threshold, the remaining £1.3 million would be subject to the 20% tax, resulting in a £260,000 tax bill.
For farms with annual profits considerably lower than the tax liability, this could necessitate selling assets or land to meet tax obligations.
The need to liquidate assets to pay inheritance tax can disrupt farming operations too, leading to:
- Reduced Production: Selling land may decrease the farm’s productive acreage.
- Equipment Loss: Liquidating machinery can hamper output.
- Succession Issues: Financial burdens may deter younger generations from continuing the family business, leading the UK to lower levels of domestic output.
Common Misconceptions
Addressing misconceptions is crucial for informed decision-making:
“Only Large Estates Will Be Affected”
While the government’s intention may be to target wealthier estates, the reality is that many family farms exceed the £1 million threshold due to high land values. An expert can help determine if your farm is likely to be affected.
“There’s No Way to Mitigate the Impact”
Proactive planning and seeking expert legal advice can offer strategies to reduce potential tax liabilities.
“The Protests Will Reverse the Changes”
While industry advocacy is vital, it’s uncertain whether the government will amend the proposed reforms. Farmers should prepare for the possibility that the changes will proceed and consult a solicitor to explore available options.
Legal Steps to Protect Your Farm
Given the potential impact of the inheritance tax changes, it’s crucial for farmers to take proactive measures to safeguard their assets and legacy. Throughout these steps, consulting an expert is key.
(i) Estate Planning
Reviewing and updating your estate plan is essential:
- Ensure your will accurately reflects your wishes and accounts for the new tax landscape.
- Clearly outline the transition of ownership to minimize disputes and ensure business continuity. An expert can assist in creating a robust plan.
(ii) Establish Trusts
Trusts can be an effective tool in managing and protecting assets:
- Family Trusts: These can help control how assets are distributed and may offer tax benefits. It’s important to consult a specialist to set up trusts correctly.
- Discretionary Trusts: Provide flexibility in asset management and can adapt to changing circumstances. Expert advice ensures compliance with regulations.
(iii) Lifetime Gifts
Transferring assets during your lifetime can reduce the value of your estate:
- Gifting Assets: Be mindful of the “seven-year rule,” where gifts may be exempt from inheritance tax if the donor survives seven years after the transfer. Consulting an expert is crucial to understand the implications.
- Evaluate the potential impact on capital gains tax and ensure you retain sufficient assets for your needs. An expert can guide you through these complexities.
(iv) Business Restructuring
Altering the structure of your farming business may offer advantages:
- Operating as a limited company: This may provide tax efficiencies. Consulting with legal and financial experts will help determine if this is suitable for your situation.
- Partnerships: Adjusting partnership agreements may help distribute assets more effectively.
How we can help
There are more options than the above that our experts could utilise and tailor to your situation. For expert guidance on how these changes may affect you and to discuss strategies to safeguard your farm, please get in touch with our dedicated team.
- Phone: Call us on 0330 111 3131
- Online: Complete our contact form for a prompt response
We’re here to help you secure the future of your farm and family.