In autumn 2024, the Labour government announced that as of April 2026, farms that are inherited could be liable to pay 20% Inheritance Tax.
This could lead to people having to sell assets to make up the money or sell the business altogether.
The farming industry is the backbone to rural areas of Cumbria.
The two main farm types across Cumbria are for grazing livestock and dairy, with the county boasting over 2,000,000 sheep and over 50,000 cows raised for beef.
The dairy industry is equally as impressive, being the second largest in the UK, with over 100,000 dairy cows that produce a whopping 9,000,000 litres of milk a year.
There is no doubt that multi-generational farmers are worrying about the sustainability of their family business, along with the long-term effects decisions like this could have on the rural communities of Cumbria and other areas of the North West.
Butterworths Solicitors, a local law firm, are here to support the farmers of Cumbria with expert legal advice and guidance during this turbulent time.
What is Inheritance Tax?
Inheritance Tax, or IHT, is a type of tax that someone pays on the value of the assets they have at the date of their death.
This includes all money, possessions and assets that are valued above a certain amount.
Under Inheritance Tax law there is the Nil Rate Band (NRB), which is the amount of assets someone can leave on death without paying tax.
At the time of publication, the NRB of individuals sits at £325,000. There is also the Residential Nil Rate Band (RNRB), which allows £175,000 from the price of a property to be tax free.
As it stands, someone can pass down up to £500,000, without any IHT being due. However, anything above that, and they will be expected to pay IHT at a rate of 40%.
Within the current laws, there are also exemptions which allow certain assets to be passed on tax free.
The spouse exemption allows people to pass assets to a spouse without paying any IHT. There are currently other exemptions, one of which is Agricultural Property Relief (APR).
Current laws surrounding Agricultural Property Relief
Currently, there is no limit on the tax relief for Agricultural Property Relief, or APR, and Business Property Relief (BPR); if someone passes down a farm, farmland, or business assets that are part of the estate, the assets are received by the beneficiaries without any tax being paid.
This law is to protect people like farmers from having to sell their assets to pay an IHT bill.
However, in October 2024, Chancellor Rachel Reeves announced that there would be a reform to the current IHT laws.
These changes impact farmers who intend to pass their assets on after they die, and it is important to be prepared for what is coming over the next few years.
What are the upcoming changes in April 2026?
From April 2026, the plan is to change the 100% relief on APR.
This means that only the first £1 million of the farm assets will be Inheritance Tax free.
However, farmers will still have the other tax-free allowances that we mentioned earlier, including the Nil Rate Band, and the Residential Nil Rate Band.
Above these allowances, the relief will sit at 50% and be charged at a smaller rate of 20% as opposed to the normal 40%.
In some cases, this makes the amount of tax-free inheritance higher than people might initially think.
For example, if two people own a farm and they pass it on to their direct descendants, the tax-free amount is doubled as both people would have the Nil Rate Band, the Residential Nil Rate Band, and the £1 million.
This would mean £3 million of their inheritance that could be tax free.
The payments can be made in instalments over 10 years, as opposed to being paid immediately like some forms of IHT, but they would be subject to interest.
However, even with all this in mind there are certain situations where these calculations could leave someone struggling to keep their family business or having to sell chunks of it to afford the IHT bill.
For example, if only one person owned a farm, and they passed it to their direct descendants, the allowance would be £1.5 million, but when you add all of their assets together, including the farm, that might not cover much.
How will it affect farmland owners in Cumbria?
The exact effect of these changes is yet to be seen, as the reform does not come into effect for another year.
A big concern is how this will affect family farms, as even modest farms may fall over the allowance when including things like the farmland, equipment, animals, and any property on the land.
Many farmers are asset rich, but do not have cash to hand to make up for a 20% IHT bill, which would mean they may have to sell assets to be able to make up the money.
There are many people standing against this change, urging the government to do a U-turn on their decision. But that does not mean farmers and agricultural landowners can ignore these changes in the hopes that the government will revert back to the old APR regime.
Contact us
Butterworths Solicitors is a local law firm who are dedicated to helping the people of Cumbria.
When it comes to the upcoming changes to Inheritance Tax, they are here to support you and help you plan for any issues that might arise in the future.
You can contact Butterworths Solicitors through the website at https://butterworths-solicitors.co.uk/ or give them a call on 01228 593939.
