Changes to inheritance tax relief: What farmers need to know

Recent inheritance tax (IHT) relief changes represent a significant challenge for the farming community. The government has announced a cap on agricultural property relief (APR) and business property relief (BPR), which currently protect farms from IHT. From April 2026, these protections will be limited. Without proper planning, significant tax bills may arise, potentially jeopardising the future of your farm.

Currently, APR and BPR allow the full value of qualifying agricultural property to pass to the next generation tax-free. However, starting in April 2026, these protections will be limited to £1 million per person, with only 50% relief on any value exceeding this threshold. For example, if a couple owns a farm with qualifying assets valued at £4 million, under the current rules, they could potentially pass it on tax-free by combining APR, BPR, and nil-rate band allowances. Under the new cap, £2 million would be fully exempt, but only 50% relief would apply to the remaining £2 million. This leaves £1 million potentially exposed to IHT, resulting in a possible tax bill of £400,000.

However, there are steps that can be taken now to mitigate much, if not all, of the IHT resulting from these rule changes. Some options include:

Rebalance ownership between spouses

Unlike other exemptions, the new £1 million APR/BPR cap is not transferable between spouses, meaning an imbalance in property ownership could lead to wasted relief. For example, if one spouse owns £1.5 million in qualifying assets and the other only £500,000, £500,000 of potential relief is wasted. By equalising ownership to £1 million worth of qualifying assets each, the couple can fully utilise their exemptions.

Gifting between spouses has no negative tax implications and can be done easily by way of a Deed of Gift. Legal advice should, however, be sought from a solicitor, as there may be steps that need to be taken to ensure the gift is effective.

Maximise the use of all reliefs

APR and BPR reduce the taxable value of your estate before applying the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB). If both of these are available - depending on factors such as the value of the estate, lifetime gifting, and to whom you are passing your residence - there is potentially a further £500,000 of allowances available. With planning, this can increase the amount that can be passed free of IHT.

In the previous example, a £4 million farm split equally between a couple could qualify for £2 million in full APR/BPR relief and a further £1 million of APR/BPR relief at 50% on the remaining £2 million, leaving £1 million potentially exposed to IHT. However, each taxpayer potentially has £500,000 of NRB and RNRB, so for a couple owning a farm within an estate that meets all the criteria for utilising full NRB and RNRB, they could cover the remaining £1 million with these allowances, reducing IHT to nil. While this may not always be possible due to the complexities involved, it is worth exploring.

Lifetime gifting

Gifting part of your farm can reduce your taxable estate, but many farmers are hesitant due to concerns about capital gains tax (CGT) or losing access to the land. However, qualifying agricultural and business property can be gifted without an immediate charge to CGT, deferring the tax until the property is sold.

A solicitor will be able to advise you on how and what to gift to avoid CGT while retaining control or access to land and property. They can also ensure the gift is effective, keeping the farm in the family.

Seek professional legal advice

The options and strategies available will differ for each farming family. It is crucial to seek professional legal advice to understand how to limit IHT under the new regulations while protecting your farm for future generations.

The recent changes to inheritance tax relief could have a major impact on farming families. Birkett Long’s dedicated Agriculture and Estates team has the expertise to help you navigate these changes and protect your farm for future generations.