The Budget: further details on reforms to agricultural and business property emerge

This post follows an earlier one regarding today's Budget's announcements: The Budget: implications for agricultural property relief.

Following the announcements in the Budget, further details have now been published regarding the proposed reform to agricultural property relief (APR) and business property relief (BPR).

From the details which have emerged so far:

• We should assume that the existing rules regarding what qualifies for 50% or 100% APR and BPR will continue to apply other than to AIM shares (discussed further below).  By way of reminder, generally speaking, these are as follows:
  • For APR, all agricultural property is relieved at 100% unless it is subject to a pre-1995 Agricultural Holdings Act (AHAs) tenancy in which case it benefits from 50% relief.
  • For BPR, most assets receive 100% relief.  Control holdings of quoted shares and assets used in (but not owned by) a trading business only receive 50% relief.

It looks like this distinction is an important one and so we should think of these as Formerly 100% Relieved and Formerly 50% Relieved assets.  The exception to this principle is AIM shares; whereas under current rules these benefit from 100% relief, this is going to be restricted to 50% relief from 6 April 2026 and so AIM shares will be treated as Formerly 50% Relieved assets going forwards.

• A new £1m allowance will apply to Formerly 100% Relieved assets.   Within this allowance, these assets will continue to benefit from 100% relief.  However, above the allowance they will only benefit from 50% relief.
• The allowance will be pro-rated as between agricultural and business property.  This is different to the current rules where APR takes priority to BPR.  
• The allowance is not transferable between spouses.
• Formerly 50% Relieved assets will not count towards the allowance.  These reforms then will only impact Formerly 100% Relieved assets.
• The allowance will apply to all inheritance tax (IHT) transfers - so transfers in lifetime and on death.  It remains to be seen if it will refresh (like the nil rate band) or whether there is one allowance for use throughout lifetime and on death.  
• The new allowance will also be available to trusts.  There will be a technical consultation in early 2025 as to how this will work.  However, the details to date are that:
  • Trusts settled before 30 October 2024 will have their own £1m allowance.  
  • Trusts settled on or after 30 October 2024 which share a settlor will share a £1m allowance (much like such trusts currently share capital gains tax annual exemptions).

This is positive news for clients who already own relieved assets through multiple trusts, or who set up new trusts ahead of the Budget in anticipation of change.  These trusts should each benefit from their own allowances, thereby multiplying the applicable allowances which might apply to an Estate or farm.  

Some examples of the impact of the reformed reliefs

A and B are mother and son and farm in partnership.  Their partnership is a composite business with farmland, woodlands, some commercial properties and some let properties.  The partnership is worth £20m, of which £10m forms part of A's estate.

Under the current rules, A would benefit from 100% relief on her death and the £10m would be inherited free of IHT.

Under the new rules, the first £1m of A's partnership interest will benefit from 100% relief.  The remaining £9m will only benefit from 50% relief and so a value of £4.5m will be chargeable at 40% = £1.8m of IHT.  It will be possible for this to be paid in instalments over 10 years, and interest relief should apply (with the result that there will be no interest payable unless an instalment is paid late).  A plan will need to be formulated as to how this charge is met.

C is the main beneficiary of her family's landed Estate.  The in-hand farmland is owned across three trusts (all of which were established long before 2024) and C personally.  The trusts are subject to the relevant property regime (which means they are subject to IHT charges every 10 years).  On C's death, under the current regime, the value of the farmland in her personal estate would have received 100% APR.  In addition, currently the three trusts do not pay any IHT on a 10 year charge.   Under the new regime, each trust plus C personally will have £1m of allowance.  Therefore, the first £4m of farmland will benefit from 100% relief and the balance will only get 50% relief on relevant IHT events.  C's trustees should take advice as to how they will pay the IHT on 10 year charges.  They may need to change the trust, or apply to Court, in order to enable them to use income to meet this charge, in order to avoid selling the land.  

Potential planning

As discussed in the earlier post, for those who can afford to give away their Formerly 100% Relieved assets, it is likely that lifetime gifts prior to 6 April 2026 will be an attractive option.  The aim will be to remove these assets from an individual's estate whilst they still benefit from 100% relief on the full value.

However, anti-forestalling rules have been announced which mean that this planning will not be successful where the donor dies within seven years and on or after 6 April 2026.  In these cases, the new rules will apply and only £1m of 100% relief will be given.  

Therefore, lifetime gifting will only be successful if the donor survives seven years (such that the gifts are not reassessed on their deaths) or where the donor dies before 6 April 2026. Accordingly, lifetime giving will be most attractive to younger donor.

Although not expressly stated, it might be concluded from the introduction of the anti-forestalling rules that gifts made prior to 30 October 2024 where the donor dies within seven years will be assessed under the current, more generous, regime, even if the death occurs on or after 6 April 2026.  Express confirmation of this point will be welcomed by taxpayers and their advisers though.

Implications for Wills

For those who own Formerly 100% Relieved assets, a review of their estate planning and Wills should be prioritised in the coming 18 months.  The lack of transferability of the allowance between spouses may lead to a rebalancing of assets between spouses / civil partners to ensure that both parties can maximise their allowances.  Both spouses should also ensure that their Wills enable the first to die to use their £1m allowance under the mantra of “use it or lose it”.  Existing Wills with specific gifts of APR or BPR assets ought to be reviewed to ensure that they remain fit for purpose.

The future of Balfour planning

Balfour planning will remain important, but will no longer have the benefits it once had.  

The case commonly known as Balfour established that where there is a composite business which is mainly trading, all the assets of the Estate within that trading business should benefit from BPR at 100%, assuming they don't already benefit from APR.  In short then, Balfour provides a way to shelter investment assets - which looked at singularly would not benefit from APR or BPR - from IHT 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).

Implications for 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 which fall into the Formerly 100% Relieved category, 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

Over the last generation, 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.  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 today’s announcements, any planning can be rendered less effective by future statutory changes.