IHT Planning for Farmers: A Changing Approach

Farming families have long relied on inheritance tax (IHT) reliefs like Agricultural Property Relief (APR) and Business Property Relief (BPR) to pass down assets without significant tax liabilities. However, with changes to these reliefs set to take effect in April 2026, farming families must reconsider their approach to IHT planning and succession.

What’s Changing?

From April 2026, the value of agricultural and business assets that qualify for 100% IHT relief under APR and BPR will be limited. Only £1 million of these assets will qualify for full relief, and anything above this amount will be eligible for just 50% relief. This means the tax burden on estates will increase, especially for larger farming businesses.

Additionally, the new rules will affect lifetime gifts, as the restriction on APR/BPR relief will apply if the giver dies within seven years of making a gift.

Positive Changes for Environmental Land

On a more positive note, from 6 April 2025, the scope of APR will be extended to include land managed under certain environmental agreements. This change offers farming families who have embraced environmental stewardship a valuable opportunity to ensure their land continues to benefit from IHT relief.

A Shift in Strategy: From Retaining Assets to Passing Them Down

For many years, farming families have preferred to retain land and assets until death, capitalising on capital gains tax (CGT) uplift for property held until death, which wiped out CGT liabilities. Combined with the 100% IHT relief for many agricultural assets, this approach made holding onto assets financially advantageous.

However, the new rules will make it more tax-efficient to consider passing assets down during a person’s lifetime, particularly when there is no immediate intention to sell the land. The strategy of transferring assets early may become increasingly attractive as it allows farming families to utilise the £1 million IHT relief sooner and reduce the overall tax burden.

Transfers into Trusts: A Viable Option

One solution that could help farming families manage the impact of these changes is transferring assets into a trust. Trusts allow individuals to pass on assets while retaining control as trustees. While large trusts will be subject to a 3% tax charge every 10 years, this may be more affordable than paying a 20% IHT charge on death.

However, trusts are not suitable for everyone and not all assets and suitable for transfer into trust. The CGT implications of gifting away assets should always be considered and also, hen assets are transferred into a trust, the donor must give up any direct benefit from those assets. This may not be ideal for individuals who rely on the income generated from their property. Therefore, it’s essential to seek professional advice to determine whether this approach suits the family’s needs and goals.

Planning for Future IHT Payments

In addition to considering lifetime transfers and trusts, it is vital for farming families to plan for how IHT will be paid in the future. IHT bills can be significant, particularly for land-heavy estates. While the option to pay IHT on agricultural land in instalments remains, some of these payments are subject to interest.

Given the potential cost, it’s important to develop a strategy for how the IHT will be funded, especially if there is no intention to sell the land. Professional advice will be critical to ensure that the best solution is found, allowing the farm to pass to the next generation without financial strain.

Conclusion

The changes to IHT reliefs in 2026 will require farming families to adjust their succession planning strategies. While these changes present new challenges, they also offer opportunities for more tax-efficient transfers of assets during lifetime and the use of trusts to protect the farm’s future. By planning ahead and seeking professional advice, farming families can ensure that their business remains financially stable and ready to pass on to the next generation.