Looking at these figures and taking into consideration the high land values seen in recent years, the ever-increasing costs of farm machinery, along with the values of the farmhouse and any farm buildings, it is difficult to see how three quarters of farms would be unaffected, as the Chancellor claims.
With this cap in place, the IHT liability falling on farming families on death could easily fall into the tens or hundreds of thousands of pounds. The owners of ‘small’ family farms, while they have valuable assets, often have little cash, rarely pay themselves a living wage and, in some years, only made a profit due to the Basic Payment subsidy which is being phased out – and following the budget, now at an accelerated rate as well. Again, this is something Defra were aware of as their figures released in September showed the average farming return on capital employed was just 0.5%. A level not replicated in many, if any, other industries.
While the tax may be payable over a 10-year period, the likelihood is there will be two main options to fund this bill; bank borrowing or selling some of the farm. As mentioned, with profitability constantly being squeezed, as well as future IHT liabilities potentially impacting their borrowing capabilities, many will have to rely on the latter.
The measure is apparently aimed at the rich who have been buying farmland to protect their wealth from IHT but, the ones who will be impacted most, both financially and emotionally, are the owners of farms which have been in families for generations. In addition, tenant farmers will have the stress of wondering whether the land they farm may have to be sold to pay an unexpected IHT bill for the landlord.
Whilst an attempt to close a tax loophole is the reason behind this cap being introduced, the Government doesn’t seem to have thought through the full impact these measures will have on growth of the economy and food security. Alongside increased wage costs that will be added to businesses across the country, serious questions have been raised about what we will see happen to British food supply and food prices in the future.
The Government has been keen to highlight the £1m APR/BPR is on top of existing reliefs, so you can still benefit from your £325,000 nil rate band and £175,000 residence nil-rate band, which can also both be gifted from spouse upon their death. They have even stated that family farms will be eligible for a total of £3m of relief; however, it will take a unique set of circumstances for this to be true. Although the threshold above which IHT will become payable will likely be higher than just the £1m cap introduced, it is important to note that you start to lose the residence nil-rate band once the net asset value of your estate is above £2m.
Whilst many farms have plans in place for succession, these measures highlight the need to plan for the future and to review those plans on a regular basis. Considering gifting assets in lifetime can help mitigate any IHT burden; whilst this has the potential of triggering a capital gains tax (CGT) liability, holdover relief may be an option to limit this. However, anti-forestalling measures mean that, for gifts made on or after 30 October 2024, death after April 2026 and within seven years of the gift will be caught by these new IHT measures. With the increase in CGT rates introduced with immediate effect, as well as the reduced tax rate for assets qualifying for business asset disposal relief (BADR) increasing from April 2025, prompt action is needed to benefit from this relief but, the timeline may not allow sufficient time.
However, there is only so much you can plan for; you often make plans for death in old age but, it only takes one unexpected death to have a significant impact on the farm’s future.
Although the main headlines were painful, it wasn’t all doom and gloom. There were concerns that the farming budget would be cut but, it wasn’t - and £200m of the previous year underspend has been rolled over as well (although the impact of inflation may mean a reduction in real terms). Fuel duty has been frozen, the Farming Recovery Fund budget has been increased to support those farms impacted most by the recent flooding and there was confirmation that land managed under environmental schemes will be eligible for APR. However, all of this seems fairly small in the big picture after last week’s announcements.
Keir Starmer spoke at the NFU conference last year and stated that “losing a farm is not like losing any other business - it can’t come back” and the Labour manifesto declared that “food security is national security”. Steve Reed (now Defra Secretary of State) spoke at the CLA Rural Business Conference last year to state no changes to APR or BPR were planned. These actions have gone against the promises by the Labour Government and, no matter what actions or measures are taken in future, it is likely the trust has been broken with the farming community to an irreparable extent.
