Farmers warned over inheritance tax hit as APR and BPR changes loom

Farmers could face significantly higher inheritance tax bills next month as changes to agricultural property relief (APR) and business property relief (BPR) come into force.

Thousands of farming businesses are being urged to review their succession plans ahead of the reforms, which will cap the level of tax relief available when agricultural land and business assets are passed on after death.

APR allows farmland and agricultural buildings to be passed down free of inheritance tax if certain conditions are met, while BPR provides similar relief for qualifying business assets.

From 6 April, the current system allowing these assets to be passed down entirely free of inheritance tax will be restricted. The 100% relief will apply only to the first £2.5 million of qualifying assets per person.

Any value above that threshold will receive just 50% relief, meaning half of the remaining value could be subject to inheritance tax.

The £2.5 million cap will apply across assets qualifying for both APR and BPR. However, any unused portion of the allowance can be transferred to a spouse or civil partner.

With farmland values rising sharply in recent years, many farming estates could exceed the new threshold, particularly where land, buildings, machinery and diversified enterprises are involved.

Experts warn the changes could significantly increase tax liabilities for many farming families and rural businesses. In some cases, assets may need to be sold to meet those liabilities.

Sean McCann, Chartered Financial Planner at commercial insurer NFU Mutual, said the reforms could have major implications for farming and rural businesses.

“The cap from April will have a huge impact on many business-owning families – including diversified agricultural and rural businesses,” he said.

“Business Property Relief was introduced to protect and encourage the continuation of trading businesses, ensuring that on the death of the owner the family weren’t forced to sell assets or borrow money to pay inheritance tax.

“The changes are therefore understandably causing significant anxiety among many business owners.”

For example, a business worth £6.5 million that previously qualified for full relief could face an inheritance tax bill of around £670,000 under the new rules.

NFU Mutual said the reforms are particularly concerning for farming families, where high-value land and property qualifying for APR can quickly push estates above the new threshold.

McCann said one step owners could consider is bringing forward succession plans.

“Many business owners will now bring forward their succession plans,” he said, noting that gifts made more than seven years before death usually fall outside inheritance tax calculations.

However, transferring assets during a lifetime can trigger capital gains tax, although reliefs such as gift holdover relief may allow that tax to be deferred until the new owner sells the assets.

McCann also warned that poorly structured partnership or shareholder agreements could unintentionally increase tax bills.

“Some partnership and shareholder agreements contain clauses that mean the ability to claim Business Property Relief is lost, which can lead to significantly higher inheritance tax bills,” he said.

For example, agreements containing a “binding contract for sale” could remove eligibility for the relief if surviving owners are obliged to buy a deceased partner’s share. Replacing this with an option agreement can preserve the relief while still allowing ownership to transfer.

Insurance may also help families manage potential inheritance tax liabilities.

McCann said whole-of-life insurance policies could provide a lump sum payment to help cover inheritance tax when a business owner dies.

“If you have existing life insurance policies, it’s important to make sure they are held in trust,” he added.

“If not, the proceeds will be included in your estate and may be subject to inheritance tax.”

NFU Mutual said reviewing succession plans, shareholder agreements and insurance arrangements now could help farmers and business owners avoid costly tax liabilities when the new rules take effect in April.

Meanwhile, the controversial reforms are also facing a legal challenge in the High Court.

The judicial review of the government’s changes will be heard at the Royal Courts of Justice on 17–18 March.

In an unusual move, the case will be heard by a Divisional Court rather than a single High Court judge.

A panel of senior High Court and Court of Appeal judges will hear the case — a step usually reserved for matters of major public importance.

The outcome of the case could have significant implications for farming families and rural businesses facing the planned inheritance tax changes.