Farming and Inheritance Tax

Historical Context vs New Rules:

• Previously, agricultural estates were fully exempt from the 40% Inheritance Tax (IHT) through Agricultural Property Relief (APR)
• The new Budget caps full exemption at £1 million
• Above £1 million, agricultural property faces a reduced 20% IHT rate (half the standard rate)

Impact on Small Farms:

The £1 million APR cap is less restrictive than it appears. For married couples, their total tax-free allowance typically includes:

• £650,000 standard nil rate band
• £350,000 residence nil rate band
• £1 million agricultural property relief
  = Total exemption of £2 million

Statistical Context:

• 87% of inherited agricultural property used less than £1M of APR and will remain fully exempt
• Just 63 estates (median value £8M) claimed nearly half of APR’s £1 billion cost

Managing IHT for Affected Farms:

For Younger Farmers (Under 70):

• Life insurance is a cost-effective solution
• Example: A £2M farm would need coverage for maximum £200k IHT
• This is typically the simplest, most affordable, and most ethical approach to IHT planning

For Older Farmers:

• Can transfer farm ownership to children
• No IHT if they survive seven years after the transfer
• Eliminates need for life insurance

For Large Agricultural Businesses:

• While insurance becomes more expensive for multi-million pound operations
• These sophisticated businesses can typically manage the tax burden
• IHT can be paid over 10 years

Addressing Common Concerns:

• Claims that £20k tax over ten years could make a £2M farm unprofitable are unrealistic
• A genuinely viable £2M farm operation should generate more than £20k annual profit

Historical Perspective:

• Before 1975: No agricultural exemption under Capital Transfer Tax
• 1975: 30% relief introduced
• 1992: Complete exemption implemented
• The sector adapted to each change without significant disruption