Inheritance Tax and the Future of Family Farms: What You Need to Know

Inheritance Tax and the Future of Family Farms: What You Need to Know

Introduction

The latest reforms to Agricultural Property Relief (APR) and Business Relief (BR) are set to change the inheritance tax (IHT) landscape for farmers and rural business owners. With the new £1 million cap on 100% relief from April 2026, families who have traditionally relied on these exemptions to pass farms down the generations may now face unexpected tax bills.

For many, this could mean selling land, restructuring ownership, or seeking new tax planning strategies to protect the future of their farms. In this post, we’ll break down the upcoming changes and explore practical steps farmers can take to manage their estate tax-efficiently.

What’s Changing?

1.    The £1 Million Cap on Agricultural and Business Relief

Currently, APR and BR provide 100% relief from IHT on qualifying assets, ensuring that farms and businesses can be passed down without a large tax burden. However, from April 2026, this will be limited:

• The first £1 million of qualifying business or agricultural property will still receive 100% relief.
• Any excess value will only qualify for 50% relief, increasing the taxable portion of estates.
• The allowance is per individual, meaning a married couple or civil partners can potentially pass on £2 million of qualifying assets with full relief.

For example, a farmer with a £5 million estate (£3 million of agricultural property, £2 million of business property) will only receive 100% relief on £1 million, with £4 million taxed at 50%. This could lead to an IHT bill of £800,000 (£2 million taxable at 40%).

2.    AIM Shares and Unlisted Business Assets Will Receive Less Relief

Many families have used AIM-listed shares as an estate planning tool because they currently qualify for 100% BR. Under the new rules, BR on AIM shares will drop to 50%, reducing their effectiveness as an IHT mitigation strategy.

3.    Pension Death Benefits to Become Taxable (From 2027)

At present, unused pension assets are exempt from IHT when passed to beneficiaries. However, from April 2027, pensions will become part of the taxable estate, making it even more critical to review inheritance planning.

4.    The Residence Nil Rate Band (RNRB) May Not Help Larger Estates

Many farmers hope to use the Residence Nil Rate Band (RNRB) to pass their home to their children tax-free. However, RNRB starts tapering down when an estate exceeds £2 million and disappears entirely for estates over £2.35 million (£2.7 million for couples).

Given that farming estates often include land, equipment, and business assets, many will find they do not qualify for RNRB at all.

How Farmers Can Plan for These Changes

The upcoming changes make proactive estate planning essential for farming families. Here are some steps to consider:

1. Review How Your Assets Are Owned

• Is your land owned personally or via a partnership?
• Assets held in partnership qualify for 100% BR (subject to the £1 million cap).
• Personally owned assets used in a business will only receive 50% BR.
• Who owns the farm?
• Jointly owned assets in a formal partnership may benefit from full relief.
• If assets are owned as tenants in common, they can be left to children to maximise allowances.

2. Consider Lifetime Gifting

• Gifting farmland or business property more than seven years before death could avoid IHT altogether.
• However, the gift with reservation rules mean the donor cannot continue to benefit from the asset.
• Some families gift land into a trust to retain control while reducing IHT exposure.

3. Use Trusts for Estate Planning

• Placing assets into a discretionary trust can provide some IHT efficiency and asset protection.
• However, trusts face a 6% IHT charge every 10 years on assets over £1 million.
• Settling assets before April 2026 could help avoid restrictions, but careful planning is needed.

4. Consider Life Insurance in Trust

• If an IHT bill is unavoidable, a whole-of-life policy in trust can provide funds to pay the tax without selling land.
• This is particularly useful where land values exceed the new APR/BR allowances.

5. Plan for Instalment Payments

• If a farm must be passed down with a tax liability, IHT can be paid in 10 yearly instalments to ease cash flow.
• However, late payments now attract a 9% interest charge, so planning ahead is crucial.

Why This Matters for Family Farms

Many farmers assume that APR and BR will always shield them from IHT, but the new £1 million cap means larger estates will now face tax bills they hadn’t planned for.
Without careful planning, some families may be forced to sell land, restructure ownership, or take on debt to settle their IHT liabilities. Early action—whether through gifting, trusts, or insurance—can help ensure the farm stays in the family for future generations.

Next Steps: Speak to an Adviser

Given the complexity of these changes, professional financial and legal advice is essential. A tailored plan can help you:

• Understand how the new rules will impact your farm.
• Use available allowances and exemptions to reduce your IHT bill.
• Explore trusts, partnerships, and insurance options to protect your assets.

If you want to discuss how to safeguard your farm from inheritance tax, get in touch for a no-obligation consultation. 

The sooner you act, the more options you have.  

The levels and bases of taxation, and reliefs from taxation, can change at any time.  The value of any tax relief is dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

SJP Approved 28/02/2025