How will farmers deal with IHT now?
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We won’t mince our words. The 2024 Autumn Statement has been a big shock for many UK farmers. Reports are circulating widely about how the agricultural sector feels “betrayed” by the decision to remove the special inheritance tax (IHT) relief they previously had.
Farmers, financial advisers and think tanks are still processing the implications of this policy change. The story is still developing, and it is possible that the Chancellor might respond to moderate (or ditch) the reform.
However, in this post, our Grantham financial advisers share thoughts on this vital subject and how farmers in Lincolnshire and other UK regions could respond with their financial planning.
We hope these thoughts are helpful. To discuss your own investments or financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:
01476 855 585
info@casfin.co.uk
What has happened?
On 30 October 2024, Chancellor Reeves delivered her first Autumn Statement announcing various policy changes to the House of Commons under the new Labour government.
In the immediate aftermath, the media focused primarily on headline reforms like the 1.5% increase in Employers’ National Insurance (NI) and rise in capital gains tax (CGT) rates.
However, as the finer details of the budget were digested, an issue was highlighted for the UK’s agricultural sector.
The Autumn Statement also announced that APR (Agricultural Property Relief) would be changed. Previously, this allowed IHT relief at either 100% or 50% upon a farm owner’s death (depending on the type of property being handed down to beneficiaries).
However, Chancellor Reeves stated that APR, generally speaking, would now only be available for farms valued up to £1m. Above that threshold, an effective IHT rate of 20% would apply to the assets.
Why are farmers reacting negatively?
The National Union of Farmers (NFU) quickly responded to the Autumn Statement by arguing that the “Family Farm Tax” must be “reversed”.
Many farmers argue that UK farms are typically “asset-rich but cash-poor”. As such, if their assets cross over the new IHT threshold when they die, their beneficiaries could be forced to sell off many of the farm’s assets to cover the bills.
Around 90% of UK farms are family-run and can face difficulties with profits due to changing weather, consumer behaviour, global wholesale prices and UK laws. The change to APR almost certainly adds further challenges to the sector.
What is the government saying?
The UK government has defended the APR changes, claiming they will have a “Negligible impact on less than 100 businesses per year”.
Chancellor Reeves has argued that it was “Unaffordable” to keep the previous system. She also appeared on BBC Sunday to reassure farmers that IHT due under the new APR regime could be paid off “over a 10-year period, interest-free.”
The government appears to be trying to stop wealthy individuals from abusing the APR regime (e.g. buying up agricultural land to avoid IHT).
Reeves also argues that the previous system was unfair, with 40% of the APR benefit going to 7% of the “wealthiest land owners”.
What can farmers do?
Sadly, the new APR rules put many British farmers in a difficult position. Despite the government’s reassurances, around 70,000 farms (according to the CLA) could now be forced to pay IHT.
Downsizing will simply not be viable for many farms. Tim Bradshaw, President of the NFU, points out that the average UK farm is 250 acres. The new APR threshold of £1m might extend to the value of a house and 50 acres. However, this amount of land is not sufficient for a food-producing business.
Another difficulty for farmers is the change to Employers’ NI and the increase in the Living Wage. This will make it more expensive for farms to employ workers.
Unlike many other sectors (e.g. technology) where certain human tasks can be replaced by automation or artificial intelligence, farming is more capital-intensive for investment and requires human hands on the ground.
What can you do as a farm owner? If you plan to hand down your farming business to other family members, options may still be open to you.
For instance, the 7-Year Rule has survived the 2024 Autumn Statement. This rule allows the value of a gift (e.g. a farm) to be exempt from IHT if the previous owner survives another 7 years after making the gift.
There is also the Residence Nil Rate Band (RNRB), which “extends” an individual’s “IHT-free threshold” by a further £175,000 if the family home is left to direct descendants, such as children or grandchildren.
Some farmers could keep more of their farm within the family by exploring options such as equity release, lifetime gifts and life insurance. However, the viability of these routes will depend on your unique goals and financial situation.
For instance, life insurance (a form of financial protection) can help certain individuals cover a future IHT bill. Instead of paying HMRC out of the value of the farm’s estate, the policy’s lump sum could cover the liability. However, this route involves paying monthly premiums which may be difficult for farmers to afford.
If you are a farmer, consider speaking with a financial adviser to get the full information you need to clarify your current position and room for manoeuvre.
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
