Update on the Autumn 2025 Budget speculation for farmers, landowners and business owners

The run-up to this year’s Autumn Budget is shaping up to be as worrying, frustrating and anxious as last year’s.  Over the past week, there have been credible reports that inheritance tax (IHT) remains in the Chancellor’s sights, plus the most detailed analysis to date of the impact of the proposed reforms to agricultural and business property relief (APR and BPR).  However, this backdrop provides ongoing uncertainty for advisers and taxpayers contemplating estate planning.

Reform of lifetime gifting

A source, apparently in-the-know, commented last week that the Government remains focussed on the “levers for taxing wealth”.  This had led to speculation that the Treasury is looking at reforming “potentially exempt transfers” or gifts to individuals in order to introduce a lifetime cap, as well as reviewing the taper reliefs which reduce the rate of IHT payable on gifts made between three and seven years before death.  

It is difficult to know how significant these changes might be.  In large part, this will depend on the level of the lifetime cap, however if this is to be a serious revenue-raising exercise, one might expect it to be fairly modest.  Although not a lifetime cap, an easy adjustment to the existing IHT legislation would be to limit all tax-free gifts (not just those into trust) to £325,000 in each seven-year rolling period.

The introduction of a cap would arguably represent an identity crisis in IHT policy.  The “potentially exempt transfers” regime has, historically, been used to encourage people to circulate wealth down generations, and not to “hoard” it until death.  Introducing a cap on would cut across that.

One report noted that the Government’s scrutiny of lifetime gifts has been prompted by an increase in taxpayers drawing down on their pensions (which are being brought within the scope of IHT from April 2027) in order to make lifetime gifts.  Since last year’s Budget a number of taxpayers have begun to draw down on their pensions in order to create surplus income which can then be the subject of an onward-gift without any IHT implications.  We may see the surplus income gifting exemption being reformed or removed altogether.

Limiting outright lifetime gifts would radically reduce tax planning opportunities.  This change will be particularly resisted by the farming and business communities.  Having been incentivised for decades by the prevailing legislation to hold assets qualifying for APR or BPR until death, the tables were turned last October for these taxpayers.  Under the proposed reforms to APR and BPR, lifetime gifts will often represent the best opportunity for minimising capital taxes (assuming that they are viable from a wider succession and financial security perspective).  If lifetime gifts are made subject to a cap, these individuals will find their opportunities for tax-planning very restricted.

CenTax report

On the subject of farmers, on 14 August CenTax produced a policy report entitled “The Impact of Changes to Inheritance Tax on Farm Estates”.  Farm estates are defined within the report as any estate which includes agricultural assets in some form.  However, if the paper’s recommendations are implemented, they would have implications for business owners as well.

The report’s aim is to provide independent evidence on the impact of the proposed changes and to discuss potential alternatives, or adjustments, to the proposed reforms.  Unlike other reports in this area, the paper considers in huge detail, and quite thoughtfully, the HMRC taxpayer data available, including cross-referencing the deceased farmer’s self-assessment, partnership or corporation tax returns in order to build an income profile of those affected.

CenTax concludes that the policy objectives of the reforms are (i) to raise more revenue and (ii) to reduce the value/concentration of APR and BPR claims amongst the wealthiest taxpayers.  It also notes that it would be consistent to conclude that the Government wishes to disincentivise investors from holding agricultural and business assets as an IHT shelter.

Analysis of the proposed reforms

The report initially splits the taxpayers by the types of claims made.  The results are interesting: 

The above figures suggest that the proposed reforms are not well targeted to the stated policy objectives. In particular:

• The investor sector represents the majority of farm estates, but is not hugely affected by the reforms and will only contribute 11% of the additional revenue.
• This can be contrasted by the owner-farmers who represent 39% of farm estates, are the largest affected sector, and will contribute 82% of additional revenue.

CenTax concedes the above definitions are imperfect and indeed there may be a large number of investors who claim APR and BPR, having taken appropriate advice in order to structure their affairs most tax-efficiently.  Later in the report the authors hone these definitions.  For example, the authors look at the share of APR/BPR assets in an estate as a proportion of the overall value in order to differentiate the types of taxpayers.  This is based on the premise that the higher the percentage of relieved assets, the more likely the estate is that of an owner-farmer and the lower the percentage the more likely that the estate belongs to an investor.  This leads CenTax to the conclusion that under the proposed reforms:

• Owner-farmers with >80% APR/BPR assets will contribute almost half of additional revenue, whereas investors with <20% APR/BPR assets will only contribute 2%.
• “Small family farms” might be defined as those where >60% of their value is represented by APR/BPR assets and where the overall estate is worth less than £5m.  This subset represents almost half of those impacted by the proposed reforms and will contribute 15% of the additional revenue.

Again, this would indicate that the reforms could be better targeted in order to meet the stated objectives.

Another lens on the data considered the impact by value of estate and affordability by reference to income levels:

• Over half of impacted estates fell within the £2-£5m bracket and represented 18% of the additional revenue which is likely to represent a sizeable burden.  
• 32% of impacted estates belong to individuals with less than £25,000 of income per year and they will contribute 10% of the additional revenue.  Another 30% of impacted estates had an income of between £25,000 and £50,000 per annum.  CenTax concludes that 77% of impacted farm estates will pay up to £500,000 of additional tax, or up to £50,000 per annum under the instalment option.  
• 86% of impacted farm estates will be able to meet the additional tax from non-relieved assets.  The remaining 14% will need to sell off relieved assets, or borrow, in order to fund the IHT.  There is no commentary on the broader impact of using non-relieved assets (for example, where these might be used to support the farming enterprises).
• Of the farms which could not meet the IHT liability from non-relieved assets, around 8% will face a residual bill greater than 20% of the farm’s income after tax and depreciation if paid in 10 annual instalments.

Critique of alternative industry proposals

It has been well publicised that the Government has not been particularly open to industry responses to the proposed reforms.  It will be interesting to see if CenTax gains any additional traction; some of its authors are known to be influential in respect of Government policy.  

CenTax, as with almost other commentators, argues that there is a strong case for making the £1m allowance transferable between spouses.  The report notes that:

• As with the nil rate band, taxpayers will develop ways of ensuring the non-transferable allowance is used with the effect that this policy may not raise much additional revenue.  
• The non-transferability introduces inequality where the well-advised taxpayer will be in a better position.  
• The additional administrative burden for taxpayers and HMRC will be significant.

CenTax rejects the industry-favoured alternative of a clawback regime whereby APR/BPR would continue to apply as per the current regime, but the relief would be removed in the event of a sale by the heirs within, say, seven years.  CenTax feels that this would be an insufficient deterrent to investors, would not be deliverable by April 2026, is unlikely to be revenue-neutral compared with the current proposal and would, in their opinion, worsen distortion (heirs would keep hold of land, rather than selling it, within the clawback period).

Recommended further revisions to the proposed reforms

As a result of its findings CenTax suggests some alternative reforms which the authors feel could (i) be delivered before April 2026, (ii) raise as least as much revenue as the current proposed reforms and (iii) minimise behavioural distortions (eg changes in how and what assets are held by taxpayers).  

Furthermore, the report focusses on making adjustments which would better achieve the Government’s stated objectives of restricting the amount of relief to the wealthiest estates, whilst protecting (ie preventing the break-up of) small family farms.  

CenTax’s proposal is to introduce three potential adjustments to the announced new reforms:

• a “minimum share” rule;
• an “upper limit” rule; and
• an increased allowance.

Minimum share rule

The idea behind the minimum share rule is to preclude investors from accessing APR or BPR.  An estate would need to have a minimum percentage invested in APR/BPR assets in order to have access to the reliefs.  CenTax suggests a 60% limit (6/10ths) could be appropriate.  This concept is based on Ireland’s Capital Acquisition Tax and so has precedence elsewhere.

CenTax suggests that the relevant fraction would be as follows:

• The numerator would be the value (before reliefs) of assets on which APR or BPR could be claimed under the current rules, except that AIM shares would be excluded.  Therefore, it would be subject to the existing ownership and occupation conditions, restrictions to agricultural value and exclusion of excepted assets etc.  The numerator would also include any APR/BPR gifts made within seven years of death.
• The denominator would be the value of the estate, including any gifts made within the previous seven years, before any exemptions, reliefs or allowances are applied.

In terms of behavioural impact, CenTax notes that this would:

• Deter gifts of non-qualifying assets shortly before death in order to pass the minimum share rule.  Such gifts would not serve to reduce the denominator.
• Deter investments into APR/BPR assets immediately before death because such assets will only count towards the numerator if the ownership/occupation periods are met.  

For more complex clients, the introduction of this rule will result in some interesting dynamics.  Since the reforms were announced last year, there has been increased interest in fragmentation (which was picked up by the Government in its consultation) as a way of reducing the market value of relieved assets by splitting ownership.  This benefit will now need to be counterbalanced against the risk of ensuring that each IHT estate / owner satisfies the minimum share rule.  In other words, whereas fragmentation valuation principles might favour, say, five owners each owning a 20% share, this structure would preclude any owner from accessing relief under the minimum share rule.

In a more common scenario, CenTax identifies that the introduction of this rule may lead to spouses concentrating ownership of the assets in one spouse where, if held equally, the minimum share rule would not be met by either spouse.  The authors suggest a targeted anti-avoidance rule could be introduced to avoid this sort of planning.  This would need to be very carefully drafted to ensure that it did not catch more benign transfers.  

The new minimum share rule would introduce additional compliance on the establishment of a trust where the availability of APR or BPR would require a valuation of the settlor’s estate and consideration of any previous gift as at the date of the settlement.  Currently this level of exercise is only undertaken once, on death.

CenTax recommends that the minimum share rule would be a “cliff-edge” so that estates which meet it would be able to access relief, whereas those who did not would not benefit from relief.  Although it is acknowledged that this will distort behavioural responses for estates close to the threshold, it is felt to be administratively simpler and also would encourage estates to exceed the threshold by a considerable margin given uncertainties around valuations and the timing of a death.

As argued by CenTax, the rule should provide better protection to owner-farmers and tenant farmers whose estates are largely represented by relieved assets.  It would be less welcome news to more significant landowners who might have significant diversified investments or non-trading businesses elsewhere.  It would also largely prevent using relieved assets as a tax-shelter given that such investors are unlikely to be comfortable holding the level of relieved assets required to meet the threshold.

Upper limit

CenTax proposes introducing an upper limit to APR/BPR claims.  Under this limit, relief would be available, but above it there would be no relief.  As a result, there could be three tiers of relief available to an estate in respect of assets which, under the current rules, benefit from 100% relief:

• 100% relief within the adjusted allowance (currently £1m, although CenTax advocates for an increase - see below).
• 50% relief above the adjusted allowance and below the upper limit.
• 0% relief above the upper limit.

This proposal would look to extend protection to smaller family farms.  It offsets the additional revenue raised from estates which exceed the upper limit with an increase in the £1m allowance.  The CenTax paper modelled a few options but suggested that a £10m upper limit would be most appropriate.  

CenTax believes this adjustment would meet the policy objective of reducing the concentration of claims from the wealthiest estates; in other words, it would shift the tax burden of the reform onto the wealthier estates.  These estates, in the opinion of CenTax, are more able to fund IHT through access to credit from financial markets.

Adjusted allowance

As explained above, CenTax has recommended increasing the 0% allowance (which is £1m under the proposed reforms).  The paper concludes that introducing both the minimum share rule and a £10m upper limit could fund a combined allowance of up to £5m whilst ensuring that the adjustments raise at least as much revenue (and indeed, markedly more in some circumstances) than the proposed reforms.  

Conclusion

CenTax indicates that the minimum share rule could be introduced independently of an upper limit, although the preference would seem to be for both.  The minimum share rule would raise more revenue than the proposed reforms, even when combined with an adjusted allowance of up to £5m.  By comparison, the upper limit was much less likely to be revenue-neutral when combined with an increased allowance.

The exact impact of these recommendations would depend on whether both the minimum share rule and an upper limit are introduced (and, in the latter case, at what level) and the corresponding increase in the allowance.  However, any combination would provide a more targeted reform which reduces the impact on small family farms.  The counterpoint though is that significant Landed Estates, and investors, would be much more impacted under these revisions.  

Other points

CenTax also refers to Balfour planning in its report and notes that “we think there is a strong case for revisiting the scope of BPR in relation to investment assets, and more generally for reviewing whether the qualifying conditions for APR and BPR remain appropriate in light of their policy objectives”.  Although no further detail was given, one might expect this is alluding to increasing the “wholly or mainly” trading test (50%+) to a predominantly trading (ie 80%+) test.