Inheritance tax changes for landed estates

The Chancellor's Budget on 30 October 2024 contained far reaching changes to Inheritance Tax (IHT), including a significant restriction on the application of Agricultural Property Relief (APR) and Business Property Relief (BPR) which will take effect on 6 April 2026. This insight considers the likely impact of these changes for the owners of landed estates.

Inheritance Tax – Agricultural Property Relief and Business Property Relief – an overview

IHT is a tax that applies, for the most part, on a person's death but it is also relevant to lifetime gifts. How much IHT is due depends upon a number of factors, including (i) to whom the assets/property are passing, (ii) whether the assets qualify for any relief and (iii) the availability of any "nil rate band". Certain assets (e.g. farmland and interests in rural businesses including diversified estates) may qualify for APR and/or BPR. The effect of APR and BPR is to reduce the value of qualifying assets by 100% or 50% for the purposes of IHT. When 100% relief is available, in most cases this means the qualifying assets are effectively exempt from IHT. For most estate owners, the availability of relief means that the land and its diversified businesses can be passed on to the next generation with much less IHT being payable than would otherwise be the case. For some, if the estate is a trading business "in the round" (under what has become known as the "Balfour" principle) it can be passed on with 100% relief completely free of IHT.

The Budget changes

The effect of the Budget changes is that for deaths occurring on or after 6 April 2026, APR/BPR will continue to be available at 100% (in circumstances where it was previously available at that level) but only up to a value of £1M (in aggregate). If the qualifying assets have a value in excess of £1M, that excess value can only qualify for relief at 50%. In other words, half of the excess value will not be relieved from IHT and will be taxed at 40%. Another way of expressing this is that the value of qualifying assets over and above £1M is taxed at an "effective rate" of 20%.

Impact on landed estates

Example
IHT current rules
IHT from 6 April 2026

Mr and Mrs X own a diversified rural estate in the north of Scotland. The estate comprises farmland, residential property, a mansion house, several trading businesses and a windfarm. The total value of the estate is £10,000,000, all of which is owned by Mr and Mrs X. Mr and Mrs X's succession plan is that on the death of the first of them to die, all of their assets and interests (their "estate") will pass to the survivor of them and then, on the death of the survivor of them, their combined estate will pass to their son.

Mr and Mrs X have been advised that the farmland will qualify for APR, and the estate as a whole will qualify for BPR under the Balfour principle. Assuming all of the usual qualifying conditions are met, this means that on the death of the survivor of them, under current rules, there will be no IHT in respect of these assets.

Under the new rules, if the death of the survivor occurs on or after 6 April 2026, 100% APR/BPR will be capped at £1M and the balance (here, £9,000,000) can only qualify for relief at 50%. That leaves the remaining £4,500,000 without any relief and taxed at 40%. At worst, that results in IHT to pay of £1,800,000. (Mr and Mrs X may have their personal nil rate bands available – if both fully available that would reduce the IHT to pay to £1,540,000.) With some exceptions, the IHT can be paid over 10 annual interest-free instalments.

Tax Planning for Spouses and Civil Partners

With appropriate planning it should be possible for Mr and Mrs X, in the example above, to reduce the IHT payable by a further £200,000. This would involve, on the death of the first of them to die, passing £1M of the APR/BPR property directly to their son, or to a trust for his benefit (rather than everything passing to the surviving spouse). This avoids aggregating all of the value in the surviving spouse's hands. This will mean that in total £2M of the APR/BPR qualifying assets qualify for 100% relief, reducing the excess to £8,000,000 qualifying for relief at 50%. (This planning will not be available if an estate owner does not have a spouse or civil partner.)

Planning prior to 6 April 2026

It may also be possible to take action before 6 April 2026, when the new rules take effect. That might involve a gift of some (or all) of the relevant property now – either to the intended heirs (in our example, the son) or to a trust for them. Careful consideration is required beforehand – including:

Asset protection issues
Capital Gains Tax
Requirements of the donor
Death of the donor

Consideration of any asset protection issues in passing the ownership and control of the relevant property to the intended heirs at this stage. Asset protection issues may include an heir disposing of an asset, bankruptcy, matrimonial and forced inheritance risk.

The Capital Gains Tax (CGT) consequences of doing so – CGT hold-over relief is often available, deferring any CGT charge, but this also involves the loss of the CGT-free uplift on death in the donor's estate.

The personal financial and other requirements of the donor – can the donor afford to give away the assets, and the associated income, for good?

The IHT consequences of the death of the donor in the seven year period following the lifetime gift. In particular, an anti-forestalling measure announced on Budget Day is that the new rules will apply to lifetime gifts made on or after 30th October 2024 if the donor dies on or after 6th April 2026.

Longer term planning and existing trusts

It is likely that most people with interests in landed estates will need to revisit their succession planning to ascertain the impact of the changes. New plans may be required – this might involve lifetime giving to spread ownership more broadly amongst the family, the use of life assurance to cover the exposure or other options.

Many landed estates are already held in trust, and existing planning may have been undertaken based on the availability of APR/BPR at up to 100% at ten year charge points and on the exit of funds from certain types of trusts. The Budget changes represent a major shift which will need to be evaluated, and plans adapted / steps taken accordingly, although the details of how the new rules will apply to trusts will not be known for some time.

What next?

At this stage, our general view is to hold off detailed estate planning until the draft legislation is published (possibly at some point in November 2024), and, where trusts are involved, possibly until the Government's planned Consultation exercise is underway (likely Spring 2025). That said, estate planning might be accelerated where there are concerns about life expectancy and in any event all those with estate interests should review their existing wills.

Stay up-to-date with IHT developments

These developments are under careful review by Brodies. If you wish to be kept updated as the landscape develops, please register for updates below. Should you wish to discuss your specific circumstances please contact your usual contact at Brodies or any one of the Personal team.