Tax trouble for farming families as APR changes raise concerns
Family business owners have formulated long-term succession plans on the overriding understanding that full relief from Inheritance Tax (IHT) would be available to them on the value of that business on death.
APR & BPR
The proposed reforms to Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”) will, if implemented, prompt considerably different succession plans.
APR and BPR in their current form reduce the value of relevant business or agricultural property when calculating the IHT due, either on death or on transfers into trust, at a rate of 100% or 50%. There is currently no limit on the amount of value which can be reduced.
It is proposed, from April 2026, in addition to existing allowances and exemptions, the 100% rate of relief of APR and BPR will continue only for the first £1 million of combined agricultural and business property held by an individual, and it will be 50% thereafter. In effect, the value of such assets above £1m will be subject to IHT at 20%.
Take action
Family business owners should review the existing capital structure to identify their potential IHT liability under the new rules. Depending on the value of the business and the age and number of shareholders, some family businesses may find considerable value will be sheltered from IHT under the new BPR allowance rules, particularly where shareholdings are diversely held and value in the business is fragmented.
Seven year rule
Otherwise, concentrated shareholdings held by elderly owners now potentially face significant IHT liabilities. Compounding this, businesses may have the majority of its liquidity in assets not readily realisable by beneficiaries on death. In terms of reducing the value of an estate, the seven-year rule for potentially exempt transfers remains in place. This essentially exempts from IHT gifts that are made between individuals more than seven years before death. However, gifts of this nature require careful planning, to ensure the shareholders retain sufficient income and capital to support their needs, and any such gifts do not fall within the gift of reservation of benefit provisions.
Whether recent protests will prompt any Government adjustments remains to be seen. Any key decisions should however await the outcome of the forthcoming consultation process, and eventual legislative detail. That said, older business owners, following years of settled succession plans, may well wish to consider gifting now and start the seven-year clock running.
Pensions
The other significant Budget announcement concerns undrawn pension funds and death benefits – currently (mainly) exempt for IHT purposes. It is proposed that such funds are due to fall within a person’s estate from April 2027.
As well as an increase in taxable assets, the inclusion of pensions in the value of an estate could cause tapering of the residence nil rate band (for those estates currently around £2M). There could also be income tax implications to consider for the beneficiary on accessing funds inherited.
The main takeaway from the proposed changes is for individuals to review their succession planning strategy and transfer wealth to future generations as efficiently as possible. Reviewing wills will be essential to reflect any new rules. Professional advice is always recommended to navigate the complexities of the new rules.
Whatever the best options are will be determined by several factors and should be discussed in full before making a decision. Contact our agriculture specialist Partner Mark Gibson or our tax planning team, lead by Partner Mark Mitchell, who can be contacted at info@thomsoncooper.com