Autumn Budget 2024 – proposed changes to agricultural property relief and business property relief

On 30 October 2024, the UK Chancellor, Rachel Reeves, made the new government's first Budget statement. 

Prior to its announcement, media and professional speculation had been rife.  The government told us that it had a massive fiscal hole to fill in order to carry out its aims – estimated to be somewhere between £20 and £40 billion. However, the Labour Party manifesto had promised not to touch a number of major taxes - VAT, income tax, and employees' NI among them – so, which taxes did that leave the Chancellor? 

For Private Client professionals, the main taxes of concern were IHT and CGT – both relative minnows in tax collection terms, but unprotected by the manifesto - with SDLT a potential third.  In the event, all three taxes were affected by the Budget, with even pensions brought into the mix on IHT, but none of them were subject to the wholesale reform that had been the subject of speculation.

One of the most significant, and unexpected, IHT measures announced, and the one we are focusing on in this note, is the limit being introduced to the 100% rate for IHT relief on agricultural property and business property.  The government intends to introduce this measure with effect from 6 April 2026. 

WHAT ARE THE EXISTING RELIEFS FOR APR AND BPR AND WHY IS THE GOVERNMENT PLANNING TO CHANGE THEM?

Under the existing rules, relief from IHT of up to 100% (in some cases, 50%) is available on qualifying agricultural and business property forming part of an individual's estate, with no limit on the value on which that can be claimed.  These reliefs are commonly referred to as APR and BPR respectively.

Both reliefs are hugely valuable, and the government has been concerned that some people investing, in agricultural property particularly, are doing so for the tax advantages rather than because of a genuine interest in farming.  It plans to change the rules to address this issue.  Its intention is to target the reliefs more fairly and particularly at smaller family farms.

WHAT ARE THE PROPOSED CHANGES?

With effect from 6 April 2026, the government plans to introduce the following measures:

• A £1 million lifetime allowance for 100% IHT relief on both business and agricultural property. For those owning both types of property, the allowance will be shared, and allocated proportionately where the total value of such property exceeds the allowance.
• For agricultural and business property over the £1 million allowance, relief will be capped at 50%.
• Shares designated as "not listed" on the markets of recognised stock exchanges (a list of which may be found here) will be relieved at 50% in all circumstances, and will not be included when calculating the £1 million allowance. As the list makes clear, this 50% rate will apply to shares registered on the Alternative Investment Market (AIM), among others.
• Shares in unquoted companies, like other property qualifying for 100% relief under the existing rules, will continue to do so, to the extent their value falls within the lifetime allowance.
• The £1 million allowance will cover the following transfers:
  • property in the estate at death;
  • lifetime transfers to individuals in the 7 years before death (“failed potentially exempt transfers”, discussed in more detail below);
  • chargeable lifetime transfers where there is an immediate lifetime charge, for example, property transferred into trust.
• Where the rate of APR or BPR applicable to a specific type of property is at 50% - for example, for quoted shares in a company giving the transferor control - it will not be affected by the new allowance.
• Any unused allowance will not be transferable between spouses and civil partners.

Relief for trusts

• Where trusts hold qualifying agricultural or business property, relief will be available to the trustees on the same basis.  The trustees will have a £1 million allowance on qualifying property on which the 1% relief applies, that will apply to relieve ten-yearly charges, which are otherwise taxed at up to 6% of the value of the trust property, and on exit charges when property leaves the trust.
• Where, before 30 October 2024, settlers had set up more than one trust containing business property, agricultural property, or both, these will each have a £1 million allowance for agricultural and business property with effect from 6 April 2026. 
• There will be rules to ensure that, where more than one such trust is set up on or after 30 October 2024, they will share a single allowance.
• The government plans to consult in early 2025 on the detailed application of the policy to charges on property within trusts.

Anti-forestalling – lifetime transfers before 6 April 2026

• To prevent people avoiding the new rules by making lifetime transfers of property before they are in force, any transfers made by individuals on or after 30 October 2024 will be subject to the new rules if the donor dies on or after 6 April 2026. 
• EXAMPLE: If an individual transfers shares or a farm worth £4 million to his or her children today, and dies on 30 April 2026, the transfer will be treated as a failed PET (a potentially exempt transfer, which is free of IHT if made at least 7 years before death). 
• Under the existing rules, the shares or farm would be entitled to BPR or APR at 100% potentially, and so pass IHT free even if the donor fails to survive for 7 years. 
• However, under the new rules, only the first £1 million will qualify for 100% relief and property over the value of that allowance (the excess being £3 million in this example) will be liable to IHT at 20%, after relevant nil rate bands have been applied.

IS CLARIFICATION REQUIRED IN ANY AREA?

• The policy paper is fairly clear in relation to the government's principal proposals, and how anti-forestalling will apply in relation to lifetime transfers in favour of individuals. 
• Where it is unclear is whether a transfer into trust of qualifying agricultural or business property made before 6 April 2026 will receive 100% relief from IHT under APR or BPR, or if any anti-forestalling provisions may apply.
• Our view, which is subject to anything to the contrary that may be proposed in the consultation when it is published, is that the existing rules should continue to apply to such transfers.  In any event, as the policy paper indicates, with effect from 6 April 2026, such a trust will be entitled to all (or, where there is more than one trust made on or after 30 October 2024, a share) of a £1 million allowance for 100% relief to set against the ongoing ten-yearly and exit charges that apply to property in trust.
• Once the government's consultation in relation to trusts is published in early 2025, their intentions should be clarified both in relation to pre-6 April 2026 chargeable lifetime transfers into trust, and as to how the new rules will apply to charges on property in trust more generally. 

IMPLEMENTATION DEADLINES 

When making decisions whether to make gifts or other transfers of property that will be affected by the proposed changes, it may be helpful to have a schedule of the relevant deadlines in order to prioritise the most pressing decisions, as follows:

WHAT TO THINK ABOUT BEFORE APRIL 2026?

APR and BPR were originally introduced to allow family farms and other businesses to continue to thrive from generation to generation.  As liquidity is often an issue for such businesses, if IHT had to be paid on the death of each successive owner, part or all of the property or business might otherwise have had to be sold to raise funds for this purpose, eating away at its viability as a going concern. 

Due to the UK's housing crisis, among other reasons, the value of land has risen hugely in recent years, meaning that even a moderately-sized farm may have a value substantially higher than £1 million, and is likely to fall within the IHT net if the proposed changes are introduced as planned. 

As such, owners of farms and other businesses in this situation should now consider what options they may have to mitigate a future IHT bill.

Possible options might include:

• Borrowing or selling parts of the business/farm for development or otherwise, to realise a fund to pay any future IHT bill, while also reducing the overall value of the business and property for tax purposes.
• Insuring the life of the owner – under the existing rules, life insurance proceeds will fall outside the IHT net and may be used by beneficiaries to pay any IHT following the owner's death.
• Spreading ownership of a business or farm among members of the family – where the farm or other business is owned by a parent or parents, for example, they may consider transferring part or all of the business to their children or other family members.  Careful structuring would be required, possibly involving a trust, family investment company or other vehicle, together with an appropriate governance constitution to avoid disputes and other issues arising.

This note provides an overview of the principal proposals for reform of APR and BPR following the Budget on 30 October 2024.  As our understanding of the proposed measures develops following publication of the government's proposed consultation in early 2025, we will report further. 

Before making any decisions, you should take advice as to how these or other changes may affect you and any trusts of which you are the settlor or trustee.  If you would like to do so, please get in touch with your usual Howard Kennedy contact, or a member of our Private Client team.    

Nothing in this client note constitutes legal advice to any person.