Farming inheritance tax reliefs increased to £2.5m in government u-turn

Controversial changes to farming inheritance tax reliefs have been watered down by the government, following significant opposition to the impact it would have to the future of farming.

The original changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) thresholds, which placed a significant risk on the family-run farming businesses across the country being successfully passed down to the next generation, have been altered with farming spouses or civil partners now able to pass on up to £5million in qualifying assets.

Thrings’ Private Client Partner Sam Doherty takes a look at what you need to know.

What are APR and BPR, and what is changing now?

APR is an inheritance tax (IHT) exemption that reduces the amount payable on the value of agricultural land and property, whilst BPR provides a similar exemption for business assets – which can be equally vital for farming businesses.

Currently, the two reliefs reduce the taxable value of the estate by up to 100%, provided the criteria is met. This means that when a farming business passes on, the heirs can inherit the land and businesses assets without the need to pay significant inheritance tax – something that would otherwise be unaffordable for many families who rely on the land for their livelihood.

The government had originally announced as part of its 2024 Autumn Budget that only the first £1million of any qualifying farming estate or business would receive the 100% relief – this has how changed with the threshold rising to £2.5million, an allowance which can be passed onto the surviving spouse or civil partner to allow for a maximum of £5million to be passed down – on top of the usual IHT allowances – before any inheritance tax is paid.

What can farmers and landowners do?

The changes will come into force soon – in April 2026 – meaning it is imperative for agricultural businesses to plan for the future to ensure they aren’t hit with a massive tax bill unexpectedly. Here are some helpful tips on what can be done to prepare:

Start your succession planning early: It is more important than ever for farmers to start planning ahead. By being proactive, you can put your estate in the best possible state to be passed to the next generation in the most tax efficient way. Start having discussions with the family early so that everyone knows what to expect.

• Gifting: One such option is to ‘gift’ parts of your estate to the next generation. Provided that you survive seven years from making the gift, the asset will be outside your estate from an inheritance perspective. You need to be careful of the gift with reservation of benefit rules, so planning is vital.
• Prepare the next generation: For families hoping to pass on their farm or business to the next generation, you need to make sure the next generation is as prepared as possible. If absolute gifts are made, then consider pre or post-nuptial agreements to ensure the estate is protected. Also consider life insurance policies to try and protect against the IHT bill.
• Review the business structure: Carrying out a regular review of your business is a good way of keeping your succession plan up to date. Do your documents work with your Will, is it possible to leave the assets to the beneficiaries you intend. Would certain business structures enable you to gift assets without losing control or incentivise the next generation.
• Assess diversification plans: If your farming operation includes diversification into other areas, such as tourism, renewable energy, or property rental, you may need to reassess how these activities are structured as, for BPR to apply, your core business must be wholly or mainly trading.
• Stay informed and seek advice: Whilst the changes being imposed are the same for all farms and estates, the impact these will have will vary in each individual case. As time goes by, further changes might also be introduced that could complicate matters further. As such, it is important to seek legal advice that can help keep your business and your assets protected from massive tax costs, should the unexpected occur.

Sam Doherty, Partner in Thrings’ Private Client team said: “Farmers have had a tough year, needing to prepare for changes that would have had such a negative impact on their livelihoods, so this backtracking by the government will certainly come as positive news.

“Increasing the relief limit to £2.5million per spouse will make a massive difference to farmers across the country who are commonly asset-rich but cash-light. It does still, however, mean that farms worth more than the cap will be hit hard when they look to pass it down, so it remains vital that business owners are doing everything they can to make their estates as tax efficient as possible – and this begins by getting sound legal advice.”

Thrings’ Private Client lawyers are experts in supporting individuals and families with a range of personal matters that are important to you. Whether it relates to a family business, land or private wealth, their expertise is there to help plan ahead in all areas ranging from succession planning and trusts, to wealth management, Wills and probate. To find out more, please get in contact.