Practical steps can be adopted to mitigate the prospective impact of inheritance tax relief changes, which were decimated in the recent budget, according to director at rural accountancy firm, Old Mill, Philip Kirkpatric.
“There’s no getting away from the fact that these are huge changes, which are going to cause a lot of heartache. The important thing is not to panic: Take stock, ensure your accountant has a thorough understanding of asset values and ownership, and make a plan.
“Work with your accountant and trusted professionals, and don’t rely on any tax planning or Wills that have been done in the past without checking it still stacks up. There is no substitute for careful planning for the future, now more than ever,” he said.
Budget
The primary change being that agricultural and business assets will only qualify for 100% relief up to a cap of £1 million per person – over and above the nil-rate band, which is tax free up to £325,000 per person, or up to £500,000 if eligible for the residence nil rate band as well.
Relief on eligible assets will apply at a rate of 50% above the £1 million cap, which in effect, would mean that inheritance tax (IHT) will be levied at 20%.
“It’s important to remember that the £1 million eligible for agricultural property relief (APR) and business property relief (BPR) is not just land – it’s all the working assets, including livestock and machinery, so that can very quickly be taken up,” Kirkpatrick said.
These changes are due to come into effect from April 5, 2026, meaning that any inheritance wrought on by a death prior to that date will be subject to the existing, unlimited APR / BPR rules.
Kirkpatrick advised that three options are available for those whose estates will be subject to large tax bills upon death of the owner – they can spread asset ownership among family members to maximise the reliefs available, sell land or borrow money to fund the corresponding tax bill.
The most sensible solution, in his view, would be to spread assets around the family.
He believes borrowing money to service debt will only “put a considerable strain on a farm business” which will increase the amount of land issued for sale, whereas, transferring assets to a spouse won’t incur any tax.
According to Kirkpatrick, landowners can also pass assets on free of IHT, provided they survive seven years from the date of the gift.
For any gifts made before the day of the Budget (30 October), there is no cap on the value or tax-free element of the gift.
For gifts made from October 30 onwards, they will be subject to the £1 million cap – should the landowner die within seven years, but, if they survive more than seven years, the gift will fall outside the scope of IHT.
“These changes are going to encourage people to hand on assets much earlier in life, which probably isn’t a bad thing for the industry. However, how the Government has chosen to do this is going to hurt some families – particularly those suffering unexpected deaths.
“If you’re making gifts and are concerned you could die within the seven- year window, you might take out insurance to cover the potential tax, just for that period; it could be an affordable solution,” Kirkpatrick said.
When restructuring asset ownership, it’s also important to consider capital gains tax (CGT) implications, while gifts to spouses are tax-free, other gifts are liable to CGT, at 18% (basic rate taxpayers) or 24% (higher rate taxpayers), he warned.
Holdover relief is one option, to defer the tax liability, and if it’s the donor’s main house, principal private residence relief can be availed but for more comprehensive business restructurings or sales, business asset disposal relief may apply on gains up to £1 million per person.
Pension funds are also expected to fall within the estate from April 2027, and will therefore be subject to tax upon death, Kirkpatrick said.
