The government’s proposed changes to inheritance tax (IHT) reliefs, specifically Agricultural Property Relief (APR) and Business Property Relief (BPR), alongside other tax reforms, mark a significant shift for industries heavily reliant on these allowances. This article delves into the fundamental changes, their potential implications, and how affected groups can respond.
APR and BPR: A New Framework Emerges
Reduced Relief on Agricultural and Business Assets
From April 2026, the scope of APR and BPR will narrow:
The first £1 million of combined business and agricultural property will still receive 100% relief, but any value beyond this will only qualify for 50% relief.
Shares in certain unlisted companies, including those on AIM, will also see their relief rate reduced to 50%, regardless of the amount.
This reform could lead to higher IHT bills for larger estates, particularly farms where land values often exceed these thresholds. For example, with land valued at £10,000 per acre, estates with over 100 acres will quickly surpass the £1 million mark, leaving excess value subject to higher tax rates.
Expansion of APR for Environmental Agreements
On a more positive note, the government will extend APR to include land managed under approved environmental agreements starting in April 2025. While this offers a nod toward promoting sustainability, it is a small concession amidst broader tightening.
Financial Pressure Builds for Farmers
Cuts to Basic Payment Scheme (BPS)
DEFRA has announced steep reductions to BPS subsidies, set to culminate in 2025:
- Payments will drop by 76% on the first £30,000, and any support beyond that will be eliminated.
- A farm previously receiving £40,000 in 2020 will see payments reduced to just £7,200 by 2025.
This substantial decrease comes at a time when farmers are already grappling with economic challenges, from volatile global markets to extreme weather events.
CGT and Its Growing Impact
Capital Gains Tax (CGT) rates are also increasing:
- The standard rates will rise to 18%-24%, up from 10%-20%, depending on income levels.
- The rules for residential property remain unchanged, with sellers required to report and pay CGT within 60 days of disposal.
These changes coincide with farmers exploring succession plans, such as gifting assets to younger generations. However, early gifting may result in recipients inheriting lower base costs, potentially leading to higher CGT liabilities upon future sales.
Broader Tax Reforms to Consider
National Insurance Contributions (NIC)
Starting in April 2025, employers will face:
- A 15% increase in NIC rates.
- A lower threshold for contributions.
- A higher Employer Allowance of £10,500, which may provide limited relief.
VAT on Independent School Fees
Families sending children to independent schools will see a 20% VAT charge applied to fees starting January 2025. This additional cost could strain budgets, especially for those already managing higher tax burdens.
Double Cab Pickups Reclassified
Double cab pickups with payloads over one tonne will be taxed as cars rather than commercial vehicles starting in April 2025 for companies and from April 2026 for individuals. Farmers considering vehicle replacements should act before these dates to maximize current tax benefits.
Opportunities Amidst Challenges
While these reforms pose significant challenges, they also highlight the importance of proactive financial planning. Key strategies include:
- Accelerating succession plans: Gifting assets earlier could help reduce IHT exposure, though CGT implications must be carefully managed.
- Exploring insurance solutions: Policies designed to cover IHT liabilities can provide peace of mind.
- Reevaluating investment and business structures: Diversification and tax-efficient arrangements could mitigate some of the financial strain.
Preparing for the Future
The combination of reduced reliefs, subsidy cuts, and rising taxes underscores the need for farmers and business owners to adapt. Engaging with experienced tax advisors and accountants will be crucial in navigating this evolving landscape. With the right strategies, businesses can weather these changes while safeguarding their long-term financial health.
