How will Inheritance Tax Budget Changes Impact Family Farms?
Inheritance Tax changes post Budget are set to impact family farms owners in Northern Ireland and across the UK, bringing significant changes to inheritance tax, leaving families facing new challenges.
Alterations to Agricultural Property Relief (APR) could mean higher tax burdens for families aiming to pass down their land.
Tax Director Liam Coulter explains what the changes are and how these changes may reshape inheritance planning for Northern Irish family-owned farms.
What’s Changed for APR & BPR?
Currently, trading businesses can qualify for up to 100% relief from IHT with business property relief (BPR) and property occupied for the purposes of agriculture can qualify for up to 100% agricultural property relief (APR).
From 6 April 2026:
· Relief will remain at 100% on combined agricultural and business property up to a value of £1m.
· After £1m, the rate of relief will be reduced to 50% (effectively a 20% charge on businesses and agricultural property values in excess of £1m).
· The £1m allowance cannot be transferred between spouses.
Recap
Individuals will continue to be entitled to a £325,000 Nil-Rate Band (NRB) and a £175,000 Residence Nil-Rate Band (RNRB). The RNRB remains available only if the house is inherited by direct descendants.
The RNRB will continue to be clawed back at a rate of £1 for every £2 where the net value of the estate exceeds £2m.
HMRC have extended the freeze on the above reliefs from April 2028 to April 2030.
What does this mean for Family Farms?
On the face of it the archetypal ‘family farm’ will be severely affected. The Chancellor claimed that the £1m 100% band would help protect small farms. However, £1m is likely to be insufficient for even the smallest of farms, meaning that practically all farmers can now expect to be subject to inheritance tax (IHT) on their deaths or at the very least be close to it.
In this basic example, if someone dies after 6 April 2026 owning a an IHT qualifying farm with a value of £4m, then £1m will be relieved at 100% relief, the remaining £3m will receive 50% relief, seeing £1.5m subject to IHT at a 40% rate. This would result in this example in a £600k IHT bill, required to be settled to HMRC. Although the payments can be spread over 10 years, the first £60k would be required to be paid within 6 months of death.
Is there Potentially More Relief for Married Couples?
The updated reliefs can in fact be more generous for true family farms than the £1m headline suggests. A married couple owning a farm together can split it in two, meaning it qualifies for £2m of agricultural property relief, plus potentially, another £500,000 for each partner if a property is involved. That means that it is entirely possible that a farm worth £3m might pay zero inheritance tax.
If we go back to the £4m IHT qualifying farm example above but this time owned jointly between husband and wife (including a farmhouse worth in excess of £325,000), on first death the estate value is £2m, the NRB and RNRB are assumed to be available along with the £1m 100% band leaving £500,000 available for 50% relief, seeing £250,000 subject to IHT at 40%. The IHT bill is now £100,000. This assumes that the 50% share of the farm is left to the children on first death (rather than passing to the surviving spouse). On second death, the same principles could apply leaving another IHT liability of £100,000. Overall, the IHT liability of £200,000 is considerably less in these circumstances.
What Advice & IHT Options can we recommend to Clients to Reduce the Impact?
Passing on the Farm & Planning Ahead
Going forward, farming families will need to weigh up passing on the farm to the next generation in their lifetime, versus the IHT impact of continuing to own the farm upon their death.
For married couples, it could be advisable to restructure Wills to ensure that assets qualifying for APR or BPR on the first death pass directly to the next generation rather than to the surviving spouse, thereby minimising the value held in the latter’s estate.
Equalising farming or business assets between spouses may also help secure relief on the first death and maximise the overall available reliefs. The impact of this is shown in the example above.
Lifetime Gifts: Dependent on Timeframes
It may be possible for farmers/landowners who can afford to give away their assets to make gifts to the next generation or settle assets into trust before the 6th April 2026 deadline. This will certainly be attractive for some assuming that the current rules for lifetime giving (PETs) and holdover relief from Capital Gains Tax remain unaffected by the budget.
Once 7 years has elapsed from the date of the gift (PET), then the value of the farm will fall outside of the death estate for IHT purposes. However, such planning will not be an option for those farmers who are financially dependent on their agricultural assets. In order for gifts to be effective for IHT purposes, the donor cannot benefit further from them. For these farmers, their planning options will be severely limited and the impact of the IHT charge on their death may, in the absence of other liquidity, lead to the break-up of their farms.
For lifetime gifts, some individuals may be concerned around the 7 year survival requirement and so life cover should be considered. In essence an individual could look to take out an insurance product to cover the potential IHT which could come into charge either on the gift they’ve made (if they don’t survive the gift by 7 years) or if they were to die holding the business assets. The downside is, these policies cost and for someone with known health issues then it may not be possible to insure. Investment advice should also be taken if entering into such an arrangement but farmers no matter how young now, if holding farming assets, may wish to consider some form of insurance product to best protect against an unexpected death in the family.
Trusts: How they could Help
The use of trusts in family tax planning should not be overlooked and may be a favoured option over the outright gift in some cases. The £1m allowance will also apply to trusts, yet care should be taken as the value of the trust is reassessed for IHT purposes every 10 years. The maximum IHT rate here is only 6%, but the IHT rates and relief applicable at that time would be in point and there could be an IHT charge arising on the 10 year anniversary where APR and BPR are restricted to 50% relief on value in excess of £1m.
Those with farmland currently held in trust should consider if there is an upcoming 10 year anniversary charge and if there is merit in the trust continuing, or whether assets should be extracted prior to that charge.
How can Wilson Nesbitt Help local Farmers with IHT?
The autumn budget has changed the landscape for many farmers, in particular re IHT. This leaves many family businesses in an unknown space, not knowing how best to manage succession of the business, whilst still protecting against the exposure of a costly IHT charge on death which could lead to the eventual breakup of the family farm.
Here at Wilson Nesbitt, we know that every situation is different and there is no one size fits all. Our expert in-house Tax and Wills teams can help you navigate your way through these changes, in a way that you understand and is tailored to your own unique position.
Get in Touch
Contact Liam and our expert Tax team for further advice; 028 9127 8154 or make an enquiry; lcoulter@wilson-nesbitt.co.uk