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Agriculture & Rural Property

Publish date

30 October 2024

The Chancellor caps Agricultural and Business Relief

The Budget has been announced and it is a bad day for farmers and business owners.  Currently, if you die owning business or agricultural assets that qualify for agricultural or business relief (AR or BR), or indeed give those assets away in your lifetime either outright or to a trust, then in many cases the value could be fully relieved from inheritance tax.

The Chancellor has announced that from April 2026, these reliefs for inheritance tax are going to be severely limited.  Only the first £1million of the combined value of business and agricultural assets will be able to attract full relief at 100%.  Assets worth over £1million will have relief restricted to 50%.   If any of the £1million allowance is unused, it will not be able to be transferred to a spouse or civil partner to be used on their death. The relief is to be applied proportionately across the qualifying assets. Whilst it is helpful to businesses that AR and BR have not been abolished completely, this is still going to create severe liquidity problems for many businesses and family farms.

The £1million allowance for business and agricultural assets will also apply to trusts holding these types of assets that would qualify for relief.  Therefore, exit and ten-year charges will be affected for relevant property trusts (which is the majority of trusts created since 2006, and many before then).  However, each trust created by a settlor prior to 30 October 2024 containing these assets will each have its own £1milion allowance for 100% relief.  Going forward, it is looks likely that the £1million relief will be shared between trusts set up by the same settlor.

Certain types of business and agricultural assets are currently only able to obtain 50% tax relief in any case, and these will not be included in the £1million allowance.

This is likely to hit farmers and landowners particularly hard.  Due to the need to diversify income streams, these types of businesses are likely to have strands of their business model that would either qualify for BR or AR.  Now, their value will be combined for calculating the relief.

Whilst smaller businesses are still protected and can continue to pass free of tax the impact on higher value businesses is likely to be substantial.

The changes mean robust valuations of the business and agricultural assets will be vitally important.  Where farm land may have development potential and the land value is now over £1million there are likely to be some high value arguments between HMRC and the land owner or their executors.

This Budget makes estate planning even more important.  Business owners will need to look at the possibility of making lifetime gifts in good time, considering entering into partnerships with the next generation and possibly insurance backed products to help pay the tax.

The government has also confirmed that it will continue to extend AR to land managed under an environmental agreement from 6 April 2025 as announced by the previous government.

This restriction to business relief will also be extended to shares invested on the Alternative Investment Market (AIM).  At the moment shares invested and owned for two years would be exempt from inheritance tax but the relief will be reduced to 50% and shareholders will not able to benefit from the £1million allowance.

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