Autumn Budget Series – Part 3: Changes to Agricultural Property Relief & Business Relief
Overview
With effect from 6 April 2026, substantial changes will be introduced to Agricultural Property Relief (“APR”) and Business Relief (“BR”) – two valuable UK Inheritance Tax (“IHT”) reliefs.
This article summarises these (somewhat controversial) changes.
Rates of relief
Under current rules, certain business and agricultural property may benefit from 100% relief from IHT, whether transferred on death, by lifetime gift or into a trust.
From 6 April 2026, 100% relief will be capped to the first £1 million only of combined qualifying agricultural and business property. Above that threshold, qualifying assets will only benefit from a reduced 50% relief. This means that the effective rate of IHT on such assets will be 20% (i.e. half of the 40% IHT rate on death).
As the allowance is combined, it will be applied proportionally across any qualifying agricultural and business property.
For example, if an estate consisted of £7 million of business property and £3 million of agricultural property, 100% relief would be available for £700,000 of the business property and £300,000 of the agricultural property.
The £1 million allowance will not be transferable between spouses and civil partners.
Assets which would only receive 50% relief under the current rules, such as land, buildings or machinery used by the business; land farmed under certain agricultural tenancies; or a controlling shareholding in a quoted company, will continue to benefit from the existing rate of relief. These assets will not use up the £1 million allowance.
AIM shares and similar investments
Shares which are not listed on a recognised stock exchange, such as AIM shares, will benefit from only 50% relief from April 2026. Under current rules, such investments may benefit from 100% BR (provided that all other relevant criteria are satisfied).
AIM (or similar) investments will not use up any of the £1 million allowance.
Fully IHT-relieved AIM portfolios have become a popular estate planning tool. Individuals may now be less inclined to use these products in their planning, although the fact that they will be taxed at effectively half the rate of other investments means they may still prove attractive.
Trusts
Trusts comprising of qualifying business and agricultural assets may currently benefit from 100% relief from IHT ‘10 year charges’ of up to 6% on the value of trust property at every 10 year anniversary of the trust and ‘exit charges’ of up to 6% on the value of property leaving the trust.
The new rules will apply to trustees as well as individuals with 100% relief available only on the first £1 million of combined qualifying agricultural and business property.
Where a settlor has established multiple trusts comprising of qualifying assets before 30 October 2024, each of these trusts will be able to benefit from its own £1 million allowance.
Where a settlor has established multiple trusts on or after 30 October 2024, the £1 million allowance will be divided between them.
50% relief will be available on qualifying assets above the £1 million allowance, such that the effective rate of any 10-year charge or exit charge will be up to 3%.
Lifetime transfers
In an effort to prevent forestalling, the new rules will apply to lifetime transfers made on or after 30 October 2024 if the donor dies on or after 6 April 2026. Whereas if a donor dies within seven years of a gift of qualifying agricultural or business property made before 30 October 2024, the full 100% rate of relief from IHT should apply.
These anti-avoidance rules may disincentivise those trying to mitigate a future IHT liability. However, it may still be worth considering whether any planning can be carried out in respect of qualifying assets – for example, settling a trust up to the amount of £1 million of combined qualifying agricultural and business property.
Consequences
The ‘Tractor tax’ (as it has been coined) has been seen as a blow to families hoping to pass their farms or businesses to the next generation. The primary concern is that many estates will have valuable capital assets above the £1 million threshold, but will not have the liquidity to pay an IHT liability without having to sell all or part of the farm or business.
By way of an example, a family farm worth £2 million would currently pass free of IHT (assuming the relevant criteria for 100% APR and/or BR was satisfied). From 6 April 2026, the farm would be subject to a potential IHT charge of £200,000 (without taking into account any other exemption or reliefs or available nil rate bands). Whilst it may be possible to pay the IHT in interest-free instalments over a 10 year period, families will still have to find significant liquid sums to settle any such liability.
Trusts consisting of business or agricultural property with value over the £1 million threshold will now have to find the funds to pay an effective tax rate of up to 3% every 10 years, whereas previously they were fully exempt from liability.
The National Farmers’ Union has decried the Budget for threatening family farms “down to the bone and gristle”, saying this change “will snatch away much of the next generation’s ability to carry on producing British food”. The extension from 6 April 2025 of APR to land managed under an environmental agreement with the UK government (such as the Sustainable Farming Incentive) may do little to reassure the farming sector.
It remains to be seen whether the backlash and protests against the restrictions on 100% APR and BR will cause the UK Government to backtrack on any proposals.
Planning opportunities
- Married couples should ensure that they each make use of their £1 million allowances as these are not transferable.
- If possible, a family may wish to transfer part of their agricultural or other business to the next generation during lifetime and consider whether insurance should be taken out to cover any IHT risk on the gift.
- Making a lifetime disposal may trigger a Capital Gains Tax charge, so consideration could be given to using a family trust and/or removing the growth element of an asset from an individual’s estate.
- In some cases, it may be possible to vary the disposition of an estate so that qualifying business and agricultural assets might pass in a more tax efficient manner.
- A family company may be able to buy-back shares, if this assists with funding any IHT.
Conclusion
The UK Government will publish a technical consultation in early 2025 with further details about how the changes to APR and BR will be implemented.
With the number of estates falling within the IHT net set to increase over the coming years, effective succession planning will become an ever more important exercise.
We strongly advise our clients with agricultural or business property to revisit their circumstances following the Budget changes.
There are still tools available to minimise the impact of IHT – for example, lifetime gifting and the ‘seven-year rule’, which, despite many rumours to the contrary, emerged from the Budget unscathed.
This note is for guidance purposes only. It does not constitute advice and no reliance should be placed upon it. We do not recommend taking any action without first taking comprehensive advice.
Please get in touch with us if you would like any advice on how the Budget changes may affect you and to discuss potential planning opportunities.
Caroline Belam & Natalie Spong