An update on the proposed changes to agricultural and business property relief – draft legislation released
It is almost nine months since the Chancellor announced the reform of agricultural and business property relief (APR and BPR) from inheritance tax (IHT). The reforms present huge potential challenges for Landed Estates, significantly increasing their IHT exposure.
Further details on the proposed reforms emerged in January with the release of the consultation. Advisers, sector bodies and taxpayers hoped to effect a reassessment of the policy as a result of the consultation responses, industry engagement with the Government, and wider public scrutiny.
On 21 July, the draft legislation was released. Although it may be some time until it receives Royal Assent, the Bill represents the Government’s continued commitment to its Budget day announcement. Those hoping for significant concessions will be disappointed; the draft legislation follows the trailed policy, other than on two points:
- The £1m 100% allowance will be indexed from 6 April 2030 in line with the consumer prices index. This is a new (and welcome) development, although relatively minor.
- The consultation had asked for views on introducing an anti-fragmentation rule which would have valued any APR and BPR assets settled by the same settlor into multiple trusts as a single holding, thereby negating any valuation discounts which arise as a result of joint ownership of assets. The Government has confirmed that it will not proceed with this proposal.
Implications for individuals
With effect from 6 April 2026, 100% APR or BPR will be capped at £1m. Any APR/BPR assets in excess of this allowance will benefit from 50% relief. This means that, above the available allowances, APR/BPR assets will be subject to an effective 20% IHT rate on death.
Individuals should consider their estate planning. Whereas to date, it has not been a priority to hand-on relieved assets, now it is likely to be a regular agenda item. For those who are able to give away assets, the options are broadly:
- Transfer into a trust before 6 April 2026 –an immediate IHT charge can arise on gifts into trust. However, transfers made before 6 April 2026 can still benefit from unrestricted 100% relief. If the settlor survives the transfer by seven years no IHT will be chargeable in respect of the gift into trust. Any capital gains can be heldover, meaning that although the gains remain capable of being brought into charge at a future date, no charge is triggered on the gift itself.
Once 6 April 2026 arrives, gifts into trust in excess of the £1m allowance and any available nil rate band will trigger an effective upfront IHT charge of 10% (or slightly higher if the settlor pays the tax). There is therefore a limited window of opportunity to undertake this planning.
- Outright gifts - 6 April 2026 is not a relevant date for making outright gifts. However, (as is currently the case) earlier gifts increase the chances of the donor surviving them by seven years. Careful advice will need to be taken on the availability of capital gains holdover which may not cover all the gains for various technical reasons.
In each case, life insurance should be considered. Due to anti-forestalling rules, a death within seven years, but after 6 April 2026, will still be subject to the new rules regardless of the date of the gift.
The sensitivities of succession conversations, given family dynamics and the emotional and financial importance of core assets, will mean this topic will need to be approached with care. Clearly one does not want to give away assets to avoid tax but introduce other forms of risk into the equation.
For those who are unable or unwilling to make lifetime gifts, a plan should be put in place for funding the IHT on death. APR/BPR assets will qualify for interest-free instalments which will enable the tax to be paid over 10 years. Life assurance is likely to play an increasingly important role in meeting this liability. Some Estates are also considering “self-insurance” or building up a “sinking fund” to meet the charge. Others are considering a “whole Estate plan” identifying assets which might be sold in extremis.
Those with more complex families should also take advice on how the £1m allowance will be allocated as between assets (and therefore heirs) when considering where the IHT burden will fall.
Despite heavy lobbying, the Government has continued with its policy that the £1m allowance should not be transferable as between a married couple / (registered) civil partners. This means that it is vitally important for all married couples / civil partners to review their existing Wills. Wills which leave assets outright to the surviving spouse / civil partner will waste the first to die’s £1m allowance. Even if Wills do make express provision for APR and BPR assets, the drafting is unlikely to be optimally tax-efficient in light of the proposed reforms. Some couples may need to reorganise their ownership of APR/BPR assets to ensure that each spouse / civil partner owns at least £1m of relieved assets in order to make use of all available allowances.
The £1m allowance will, like the nil rate band, refresh every seven years. We may therefore see a growing interest in individuals making regular settlements; it would be possible to settle £1.65m of agricultural or business assets every seven years without triggering an immediate IHT charge.
Implications for trusts
Broadly speaking, pre-Budget trusts should each benefit from a £1m allowance so long as they held assets which, under the new rules, would have qualified for 100% APR/BPR on 29 October 2024 (ignoring the ownership and occupation conditions). Trusts set up on or after 30 October 2024 by the same settlor will share a £1m allowance, allocated on a chronological basis.
Trustees should take steps now (when the information is most readily available) to identify if the trust is a “qualifying pre-commencement settlement”; trusts which held no APR/BPR assets, or held assets which only qualify for 50% relief (such as AIM shares or Agricultural Holdings Act tenancies (AHAs)) will not fall within this category. Trustees of new trusts will need to understand if their trust has a 100% allowance and, if so, how much. This may require liaison with the settlor and trustees of other settlements.
Some trustees have kept historic trusts going, in light of the Budget announcements, on the basis that they may benefit from a £1m allowance each. If these are not “qualifying pre-commencement settlements” these may now be wound up.
Trusts subject to the relevant property regime
Trusts will also need to consider how IHT is funded on APR/BPR assets. Trusts within the 10 year charge regime will face an effective rate of IHT of 3% on these assets on a 10 year anniversary (to the extent they exceed the trust’s allowance) and when assets leave the trust.
The IHT can be paid in interest-free instalments. However, trustees should consider their powers under the trust deed to pay capital expenses from income, or to retain income to order to meet expenses. Changes may need to be made to enable tax-efficient payment of the IHT from available cashflow.
The reforms also amend how exit charges from relevant property regime trusts will be calculated. These are technical amendments which go beyond the scope of this note, but underline the need for trustees to take advice on how APR/BPR will apply to trusts.
“Qualifying pre-commencement settlements” will only become subject to the new regime from the first anniversary after 6 April 2026 which could fall as late as 29 October 2034. The first 10 year charge will also include relief for the quarters in the preceding decade which fell before 6 April 2026. These transitional provisions provide a much longer window of opportunity for trustees to consider tax planning. For example, trustees who do not find ongoing 10 year charges palatable might consider winding the trust up by taking advantage of the fact that 100% relief for these trusts will remain unrestricted until the first post April 2026 10 year anniversary.
Trusts subject to the beneficiary regime
Trusts subject to IHT on the death of the life tenant will be subject to an effective rate of IHT of 20% on APR/BPR assets (over and above the £1m allowance, to the extent that is available to the trust, taking account of any APR/BPR assets personally owned by the life tenant). Preparing a funding plan will be equally important for these trusts and may also involve the use of life assurance.
Trustees should also consider undertaking restructuring in order to remove these assets from the life tenant’s estate for IHT purposes. Prior to 6 April 2026, it will be possible to terminate the beneficiary’s interest, whilst leaving the assets in trust, and benefit from unrestricted 100% relief. No capital gains tax (CGT) would become due in these circumstances.
As with relevant property trusts, pre-Budget trusts may be “qualifying pre-commencement settlements” which will be relevant to the calculation of relevant property regime charges following the life tenant’s death. Taking advice on this point, when the information is most readily available, would be helpful.
Other planning points
Balfour planning
Balfour planning looks to shelter investment assets from IHT - which looked at singularly would not benefit from APR or BPR - by bringing them into a composite business which is mainly trading. If the trading assets (eg in-hand farms and woodlands) outweigh the investment assets (eg let farms, properties and commercial buildings) these latter assets will benefit from BPR assuming they form part of the Estate's composite trading business.
These principles will still apply but the prize is less attractive. Whereas previously investment assets within a Balfour structure would benefit from 100% relief, they will now only benefit from 50% relief (assuming that the £1m allowance has already been used elsewhere on an Estate).
Similarly, traditionally a common theme has been to introduce assets used in a business, but held outside the business, onto the balance sheet in order to benefit from 100% BPR rather than 50%. However, where the asset is held (ie on or off balance-sheet) will no longer increase the rate of relief (although it may “boost” the trading side of the Balfour matrix if held on the balance sheet).
AHAs
Since 1995, it has been a common planning point for landowners to either take land “in-hand” or to replace AHAs with farm business tenancies in order to benefit from 100% APR on the freehold value of the land, rather than 50% APR.
It is unlikely that replacing AHAs will be beneficial under the new regime. Assuming the landowner has other assets in excess of £1m, there will be no benefit to replacing the AHA because either way the freehold value will only benefit from 50% APR.
Indeed, maintaining the AHA will be beneficial from a tax perspective because it will depress the valuation of the freehold.
Value fragmentation
For the last 30 years, the focus on IHT planning for Landed Estates has been to maximise APR and BPR at 100%. The proposed changes will represent a dramatic change to traditional Landed Estate structuring given the 100% prize is no longer available.
It is likely that more creative planning will become common; most likely that which focuses on value fragmentation. Examples include reversionary lease schemes which had their hey-day in the 1990s; the application of these are now largely limited to trusts following legislative changes to counter this planning for personally owned assets.
When purchasing new assets, Estates may also consider purchasing directly into multiple ownership structures (eg a joint purchase by several trusts) in order to introduce discounts. However, any tax benefits must be weighed against the additional administrative burden of split ownership.
Although companies have not been traditional holding vehicles for Landed Estates, we may see an uptick in interest in these structures because it opens up possibilities for introducing discounts. However, any major restructurings will need to be considered carefully. Upfront costs might be significant. Fragmentation of ownership gives rise to concerns about control and management. Finally, as shown by these reforms, any planning can be rendered less effective by future statutory changes.
Diversification and Environmental Land Management Schemes
The restriction of 100% relief will reduce the IHT benefits of starting new trading enterprises. From 6 April 2025, land in Environmental Land Management Schemes has been treated as used for agricultural purposes for APR. However, from 6 April 2026, this only opens the door to 50% APR on these assets to the extent they exceed the £1m allowance.
The commercial cost-benefit-risk analysis of more diversified enterprises will shift as a result of the new IHT reform, particularly given the wider context of growing pressures on trading businesses including increases in National Insurance Contributions.
We may see less uptake of environmental schemes and wider diversification efforts, with the new regime heralding a period of less inward-investment into Landed Estates.
Conditional exemption
It is not commonly known that conditional exemption can be claimed in respect of land which is of outstanding scenic, historic or scientific interest. We expect to see an increasing interest in this given the restriction of APR and BPR.
Conditional exemption is a deferral mechanism, enabling the IHT which would otherwise be due on a tax event to be deferred until a later date. The exemption is granted subject to undertakings (which are effectively conditions) requiring, most importantly, public access to the exempted land. The deferred tax will become due if the undertakings are broken (eg by denying public access), or land sold. The calculation is complicated and depends on the event from which tax was deferred. However, where the tax was deferred on a death, the deferred rate is applied to the market value of the asset when the tax becomes due. It is very important to note that APR (or indeed BPR) cannot be used to reduce the value for tax at the time the deferred tax becomes due. Therefore, IHT at the “headline” rate of up to 40% (rather than the reduced APR/BPR rate of 20%) will be due on the market value of the land at the time the charge becomes due. Families will need to be very sure that they were happy to retain the land, and keep the undertakings, before entering into the conditional exemption regime, otherwise the ultimate tax burden to unwind that arrangement could be much higher than that which they sought to defer initially.
Land values
Finally, it is possible that agricultural land values will fall in response to the reformed reliefs. A concern of the Government has been that values have been inflated by investors seeking to invest in agricultural land as an IHT-relieved asset class. If this is correct, and demand falls, one may also expect land values to fall which may go some way to mitigating the higher IHT charges post 6 April 2026. We have not yet seen a drop in values, but this may be due to ongoing optimism regarding a change in policy. If so, the publication of the draft legislation, may be a catalyst to a reassessment of value.
If land values do fall, taxpayers will wish to consider their CGT position and whether, if assets are standing at a loss (or more modest gain), they would prefer to make lifetime gifts at the depressed value, rather than hold assets until death where the CGT rebasing provisions will rebase the property to a lower value.
Pensions
It was confirmed that APR and BPR will not apply to assets held within pension scheme which, from 6 April 2027, will also form part of a person’s estate for inheritance tax purposes. The personal representatives will be primary liable for the reporting and payment of these liabilities.
