Agricultural Property Relief: tax break or food security?

Agricultural Property Relief (APR) was introduced as part of the UK’s inheritance tax system to help farmers pass down agricultural property and land to their heirs without incurring prohibitive tax liabilities. 

By offering 100% relief on qualifying agricultural assets, APR was intended to preserve family-owned farms, maintain rural communities, and ensure continuity in agricultural production, avoiding the forced sale of farmland solely to cover inheritance tax costs.

The roots of APR trace back to the government’s desire to support agricultural stability, recognising that many farms lack the liquidity to cover high inheritance taxes without selling off parts of the business. This relief has enabled family farms to transfer ownership through generations, ensuring long-term land stewardship and sustainable agriculture.

Autumn Budget 2024 changes

The recent reduction in APR, announced in the October 2024 budget, involves taxing 50% of agricultural value above a £1 million threshold at a reduced 20% rate instead of the prior full relief. 

This adjustment is expected to take effect in April 2026. 

While the government asserts that most small farms will remain unaffected, critics argue that these changes could destabilise British farming. 

The National Farmers’ Union (NFU) has raised concerns, estimating that up to half of the country’s farms, especially medium to large family-run operations, may face tax liabilities that make it challenging to retain ownership across generations. This tax burden could prompt some farmers to sell their land, potentially reducing available farmland, which may negatively impact domestic food production and rural economies.

Farmers and agricultural advocates argue that APR’s reduction undermines the incentives for investing in agriculture and may shift farmland toward non-agricultural uses. This would not only impact individual farming families but also alter the structure of British agriculture, making it more difficult for smaller and medium-sized farms to survive financially.

The policy may also create openings for overseas growers and exporters to increase their market share in the UK. 

By potentially decreasing domestic food production, this policy could lead to several economic shifts that benefit foreign producers:

1. Increased Dependency on Imports: With British farmers facing new tax liabilities, some may be forced to sell land or reduce operations. This could reduce the domestic food supply, making the UK more reliant on imports to meet demand. Countries with well-established agricultural exports, such as those in Europe, South America, and North America, may find increased opportunities to export their products to the UK.

2. Competitive Pricing: If UK farmers pass on the costs of increased taxes to consumers to stay financially viable, prices for domestically produced foods could rise. Overseas producers, particularly from countries with lower production costs, may be able to offer similar products at a lower price. This price advantage could allow foreign suppliers to capture a larger portion of the UK market.

3. Long-Term Land Use Shift: Reduced APR may discourage new entrants into farming, especially young farmers who could face significant tax burdens upon inheritance. This could lead to a gradual reduction in UK-grown produce as agricultural land is either sold or repurposed. In the long run, this reduced domestic capacity could solidify the role of overseas growers as primary suppliers for key foods, especially fresh produce and staples.

4. Lower Investment in UK Agricultural Innovation: The additional financial strain from reduced APR may limit UK farmers’ ability to invest in modern farming techniques or sustainability efforts. This could, in turn, reduce the competitiveness of UK-grown foods compared to imported alternatives, which may benefit from advanced, efficient farming systems in other countries.

Overall, by potentially shrinking the domestic agricultural sector, reduced APR could amplify the UK’s reliance on imported food, creating favourable conditions for overseas growers who are ready to fill gaps in supply. 

What specific actions can farmers take to mitigate the proposed tax changes?

The proposed inheritance tax changes are very significant and are acting as a catalyst for individuals and families to assess the impact of the proposals on their plans for succession. 

With 14 months before the proposed reforms come into force, it is important that families engage in these discussions as a matter of priority and that appropriate advice is taken. 

Matters to consider would include quantifying what the likely inheritance tax exposure might be, consideration of how this will be funded, and determining if there is any action to be taken.

Under the current rules, there has been no tax incentive to making lifetime gifts of agricultural assets, in fact there has been a capital gains tax benefit to holding them until death. On death, the assets will pass relieved from IHT and rebased for capital gains tax purposes. 

Generally speaking, the new regime will turn this on its head and encourage outright gifts of APR assets. Whilst lifetime gifting should be considered, this will only be successful if the gift is survived by seven years. Term life assurance might be an option to cover this risk, although this may be prohibitively expensive for older donors. 

The new £1m allowance will not be transferable between spouses (unlike the nil rate band and residence nil rate band). Couples should therefore review their current Wills and take advice to ensure that the ownership of the assets is appropriately divided between them, and that they have suitably sophisticated Wills in place, to enable each £1m allowance to be used on both of the deaths.

Next steps

There is also a window of opportunity until 6 April 2026 to settle APR assets into trust and not trigger an upfront IHT charge should the settlor survive seven years. 

If you would like to discuss how these forthcoming changes could impact you and your farm please contact Bishop Fleming.