The agriculture sector plays a vital role in the UK economy, ensuring food security, creating jobs, and promoting environmental sustainability. However, one of the significant challenges farmers and landowners face is navigating the complexities of Inheritance Tax (IHT), which can have profound implications for the continuity of agricultural businesses. In this blog, Steve Tetley, the leading Law Firm rradar’s Tax team leader and a former HMRC senior inspector, with over 30 years of industry specialist knowledge, looks at the IHT challenges faced by farmers.
What is Inheritance Tax?
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. There’s normally no Inheritance Tax to pay if either:
- the value of the estate is below the £325,000 threshold;
- everything above the £325,000 threshold is left to the deceased’s spouse, civil partner, a charity, or a community amateur sports club.
The standard Inheritance Tax rate is 40%. It’s only charged on the part of the estate that’s above the threshold.
Property that qualifies for agricultural property relief can be passed on during the owner’s lifetime or as part of their will without being subject to IHT.
Recent Budget Announcements:
From 6th April 2026, the full 100% relief from IHT will be restricted to the first £1 million of combined agricultural and business property. Above this amount, landowners will be entitled to 50% relief and will pay IHT at a reduced effective rate of up to 20%, rather than the standard 40%.
This tax can be paid in instalments over 10 years interest-free, rather than immediately, as with other types of IHT.
The further exemptions for spouses will continue to apply together with the generally available nil-rate bands. This means that two people with farmland, depending on their circumstances, can pass on up to £3 million without paying any IHT.
However, this is an assumption based on the £1 million limit and nil-rate bands and does not take into consideration specific circumstances that may affect the tax calculation.
Capital Gains Tax
Capital Gains Tax is payable when an individual sells or gifts assets that have risen in value since first acquired.
A farmer may be able to defer Capital Gains Tax on agricultural business assets if they:
- are a sole trader or business partner, or have at least 5% of voting rights in a company;
- use the assets in their business or personal company.
You can usually get partial relief if you use the assets only partly for your business. The deferral relief can apply to gifts and assets that are replaced within a qualifying period.
Key IHT Challenges for Farmers
Valuation of Agricultural Assets:
Land, buildings, and farming equipment often appreciate over time, leading to significant IHT liabilities. Accurately valuing these assets is crucial to ensuring a fair tax assessment and avoiding disputes with HM Revenue & Customs (HMRC).
Agricultural Property Relief (APR):
APR can provide up to 100% relief on agricultural property if it is actively used for farming purposes. However, the eligibility criteria can be stringent, requiring careful planning to meet the necessary conditions.
Business Property Relief (BPR):
In cases where farming activities are structured as a business, BPR can reduce the taxable value of assets, offering up to 100% relief. However, mixed-use farms or diversified enterprises may face difficulties in qualifying for full relief.
Succession Planning:
Many farming families struggle with succession planning due to the intergenerational nature of agricultural businesses. Without clear succession strategies, families may face forced asset sales to meet IHT liabilities.
Planning Strategies to Mitigate IHT
Early Planning:
Engaging in early estate planning helps farmers structure their holdings to maximise available reliefs and exemptions.
Diversification Considerations:
Farmers should be cautious when diversifying into non-agricultural activities, as this can affect APR eligibility and increase IHT exposure.
Use of Trusts:
Trusts can be an effective tool for passing down agricultural assets while maintaining some control and minimising tax exposure.
Professional Advice:
Seeking expert advice from agricultural tax specialists ensures compliance with evolving tax laws and the optimal use of reliefs.
IHT remains a significant concern for the agriculture sector, potentially threatening the viability of family-run farms. Through strategic planning and professional guidance, farm owners can navigate these challenges and secure the future of their agricultural legacies.
Farmers should consider accessing professional advice through their Rural Protect insurance policy, which includes rradar’s advisory service embedded within it at no extra cost. Taking advantage of these services can provide valuable insights and tailored strategies to mitigate IHT liabilities effectively.
Steve Tetley commented on the new tax regulation, stating, “I cannot stress enough the importance of seeking inheritance tax advice sooner rather than later. Early planning allows farmers to take full advantage of available reliefs and ensures that their agricultural assets are structured in the most tax-efficient manner. Delaying these discussions can result in missed opportunities and increased tax burdens. Being proactive can secure the long-term sustainability of farming businesses and provide peace of mind to families.”
If you’d like to know more about Rural Protect, our Management Liability Policy for the Agricultural sector, call us on 01653 609090 or email enquiries@hbunderwriting.co.uk.
