Guest blog: Inheritance Tax Reform – impacts and implications
As has been well reported, the Chancellor's Autumn Budget introduced unexpected major reforms to Inheritance Tax (IHT), causing upset within the sector. The government claims they aim to raise funds to fix public finances while protecting small family farms from high inheritance tax. The farming minister, Daniel Zeichner suggested they aim to prevent non-farmers from exploiting the tax system, encourage succession and improve productivity.
From 2026, the full 100% relief will be limited to the first £1 million of combined agricultural and business property. Beyond this, a 50% relief will apply, resulting in an effective IHT rate of 20%.
Trusts will also be impacted, with a combined £1 million allowance for trustees, subject to 100% relief on each 10-year charge and exit charge. The awaited technical consultation in early 2025 will provide further detail.
The Office for Budget Responsibility forecasts that IHT will raise £7.5 billion in 2024/25. The Treasury projects an additional £520 million annually by 2028/29 due to the APR and Business Property Relief reforms. Although significant, this increase represents only 0.05% of national tax receipts.
Modelling suggests that farms over 124 acres will face an IHT liability if they use their personal reliefs – this represents a third of the UK’s holdings and most (88%) of the UK’s agricultural land. In contrast, smaller landowners who don’t operate viable family farms will benefit from full IHT relief.
Succession
A 2022 CLA/Farmers Guardian survey found that 90% of farmers had identified their successors, with 59% expecting to hand over to children. Lifetime gifting will become more common, though ‘reservation of benefit’ issues need careful consideration. While the policy may encourage earlier transfers of ownership, there’s no evidence it will boost productivity. Those impacted most are those that do not have the necessary seven-year window to plan. With no one-size-fits-all solution, professional advice on tax and succession planning will be crucial.
Farm Types and Sizes
Single owners of arable farms of c150 acres and upland livestock farms of c300 acres will face IHT, assuming they have no other assets. Farmers, often ‘asset rich but cash poor’, have lower returns on capital employed (ROCE) than other industries: a secondary 400-acre arable farm could face over £560,000 in tax, requiring 126% of the business’ profit over the 10 years following the death to pay it.
A 400-acre upland livestock farm faces over £140,000 in tax. With a median ROCE of -1.09% in the last 10 years, there's no profit to pay the IHT. As such the APR reform will mean some farmers may need to sell parts of their land, or entire farms, to cover IHT liabilities. Future market impacts are not yet clear, but we may see increased land supply, potentially higher prices for smaller farms, while larger farms may see a decrease in value due to the higher tax burden.
The reforms may encourage earlier succession planning, shifting the demographics of farm ownership. Financial strain on farmers could also impact their ability to maintain operations without selling land or taking on debt. Some tenants are also caught, and it’s clear that this tax is unlikely to achieve the Treasury’s aims but go right to the heart of our farmers and food producers.
Though we’re yet to see evidence of price adjustments the APR reforms are likely to create a more dynamic and challenging market. Farmers and landowners will need to carefully consider their succession plans and financial strategies to navigate these changes effectively.
For further information on IHT Reform, contact SAJackson@savills.com or 07807999699
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