Rural Partner, Tom Davies discusses The Autumn Budget and the potential Inheritance Tax impacts on rural farming businesses.

The Autumn 2024 Budget, ‘Fixing The Foundations To Deliver Change’ maybe considered somewhat far from the truth particularly to those involved with rural farming businesses.

From 6^th April 2026, Inheritance Tax reliefs will be reformed, agricultural and business property will have a combined 100% relief cap of £1 million. The rate of relief thereafter will be 50% at an effective rate of 20%.

The current Inheritance Tax nil-rate band of £325,000 and residence nil-rate band of £175,000 will continue at these levels until 5^th April 2030, with the residence nil-rate band taper continuing to commence at £2 million. This enables qualifying estates the ability to pass on up to £500,000 or for a married couple up to £1 million without a tax liability.

It must also be noted, that unlike the nil rate band and residence nil-rate band, the combined agricultural and business property relief cap of £1 million is not transferrable between spouses. Should the first spouse only utilise £750,000 of the relief, the remaining £250,000 cannot be transferred to the surviving spouse.

Taking the above into consideration, a married couple involved within an agricultural business could have a maximum relief of £3 million. Broken down as £1 million each taken from the Agricultural Property Relief cap and their combined nil-rate band and residence nil-rate band.

Evidence suggests that perhaps Rachel Reeves and her Government are out of touch, that 73% of farmers will not be impacted by the changes. 2023 figures published by Defra state the average English farm size is 217 acres and Welsh Government figures from 2022 suggest the average Welsh farm size is approximately 120 acres. These figures may be somewhat distorted as they would include both the largest and particularly the smallest areas.

As an example, we’ll say the average farm size in the England & Wales is 200 acres and includes farmhouse and range of farm buildings at a combine asset value of £3 million. The farm business’ machinery and implements are valued at £250,000 and the livestock at £400,000. The business like most others has diversified and converted a traditional range into 2 holiday let units. The total assets amount to £4 million.

Using the above example, and the property being in sole ownership, assuming the £325,000 and £175,000 reliefs have not already ready been utilised, the maximum relief available would be £1.5 million. Leaving a taxable balance of £2.5 million, which would present a tax liability of £500,000.

On the other hand, assuming the property and assets were equally owned by a married couple, who are eligible for the maximum relief of £3 million, (providing the first deceased spouse did not leave their half to the remaining spouse but to a child or grandchild). The remaining taxable balance would be £1 million, which would present a combined tax liability between spouses of £200,000, which would be a tax saving of £300,000.

These examples are based upon the properties being owned outright, with no outstanding debt held against them. Should the properties be subject to mortgages or outstanding debt, the debt amounts are deductible from the asset value for Inheritance Tax purposes.

These tax liabilities can be payable over an interest free 10-year period.

Again, utilising the above examples, if paying the tax over the 10-year period: £50,000 per annum or a rental equivalent of £250 per acre and £20,000 per annum or a rental equivalent of £100 per acre, the values would be out of post-tax earnings, which could consequently reduce or prevent investment and limit the ability to borrow.

It is destructive blow to an already vulnerable industry, despite every UK citizen requiring ‘a farmer three times a day’ and without careful planning Rachel Reeves’ ‘foundations’ may subside and be left to crumble.

Succession planning has now become more significant than ever. Every farming business will be different, however, conversations about protecting the business and tax planning should be at the top of every list. Whether decisions are made to carry on as is, gift, or place in trust, everyone’s circumstances will be different, but taking advice early and being adaptable will ensure business resilience.

Should any clients old or new require professional services, such as farm, land or livestock valuations we are here and ready to support you.

Morris Marshall & Poole here for the last 162 years, with you for the next 162 years.