As Budget approaches, farming families urged to look closely at inheritance tax planning

The current £1 million inheritance tax allowance, which combines the standard nil-rate band and residence nil-rate band, has provided a valuable buffer against rising land and property values. However, upcoming reforms could significantly reduce or restrict these allowances, placing greater financial pressure on estates that are already asset-rich but often cash-poor.

“Unlike other families who may pass down primarily liquid financial assets, farming estates typically consist of farmland, machinery, livestock and the family home, all of which may be subject to inheritance tax unless covered by Agricultural Property Relief (APR) or Business Relief (BR),” explains Teresa Dunning, Financial Planning Director at financial advisory firm Hoxton Wealth, who works extensively with farming families.

“Potential changes to the residence nil-rate band, tighter eligibility rules, or reduced thresholds could mean that more of the farming estate falls into the taxable bracket, even where the intention is simply to keep the farm in the family.”

This, says Dunning, makes proactive planning critical with farming families needing to consider not only how their main residence is treated for IHT purposes, but also how the farm is structured, who qualifies as an “active farmer”, and whether diversification activities (such as holiday lets or solar leases) could inadvertently reduce relief eligibility.

“With the possibility of allowances being withdrawn or restricted, there is a limited window to review succession plans, formalise the role of the next generation, and ensure that both APR and BR are maximised while they remain available in their current form.”

So, what steps should farmers be taking now?

“It’s important to understand your IHT liability,” continues Dunning.

“Start with a full, realistic valuation of the estate: farmland (with any development hope value), farmhouses and cottages, agricultural buildings, machinery, breeding stock and livestock, crops in store, quotas/entitlements, and any non-farming assets such as investments. Set this against the current nil-rate band and any transferable allowances, then map where exemptions or reliefs may apply."

Families need also to maximise agricultural property relief (APR), she continues: “Confirm which parts of your farm qualify for APR, potentially up to 100% on agricultural value, and document the basis for the claim. Evidence active agricultural use, ensure occupation and ownership tests are met, and check title details match the reality on the ground (particularly where land is farmed by the next generation or under contract/FBT arrangements). Where assets fall outside APR, consider whether Business Property Relief (BPR) could apply.”

A third suggestion is to use trusts for asset protection and review life cover:

“Trusts can ring-fence value for the next generation while retaining appropriate control and governance,” adds Dunning.

“They can also help manage IHT exposure, protect against divorce or bankruptcy risks, and provide a framework for decision-making. In parallel, review existing life assurance – especially whole-of-life cover written in trust – to provide liquidity for any eventual tax bill so the farm isn’t forced into a distress sale.”

Dunning also recommends planning lifetime transfers”:

“Farmers should be making purposeful use of the annual £3,000 gifting exemption (and small gifts exemptions) and consider larger lifetime transfers where appropriate. Potentially Exempt Transfers fall out of the estate after seven years, so early, planned gifting, aligned with control, cash-flow needs, and succession goals, can materially reduce exposure. It’s important to keep meticulous records to support future claims.”

This leads into the importance of reviewing succession plans.

“You need to set out clearly who is to inherit the farm, the farmhouse, and any non-farming assets, and on what terms,” she says.

“Update the will and partnership or shareholders’ agreements to reflect current roles, contributions, and aspirations. Where more than one child is involved, consider fairness versus equality, and how to keep the core business viable while providing for non-farming heirs.”

And, Dunning adds, it’s important to seek professional advice.

“You will need a solicitor, an agricultural accountant, and a financial planner who understands APR/BPR, partnership/shareholder dynamics, and the realities of tax and succession planning to make sure you’re using today’s rules as effectively as possible.”