APR/BPR reform – What steps should I take to begin planning for the changes?

The Government’s Autumn 2024 Budget saw significant changes to the Agricultural Property Relief (APR) and Business Property Relief (BPR) rules, through the introduction of a restriction on the 100% relief from inheritance tax (IHT) to the first £1m of qualifying assets. Any excess asset value over this amount will only receive 50% relief from IHT, resulting in an effective tax rate of 20%.

Despite significant lobbying from farmers and industry representatives, there is no sign of any changes being made to these rules, meaning farmers and business owners must now begin planning in order to mitigate any IHT that may be due on their estate. This article discusses some initial actions to take to assist with IHT planning.

Ownership of assets

It is important to identify what assets are owned by an individual, particularly where they have more than one owner, such as partnership assets or jointly held property. If the ownership of assets is not clear, it would be beneficial to have a discussion with your solicitor to confirm this. Details of the base cost of each asset will be needed when carrying out succession planning, so knowing the purchase date, cost or when an asset was inherited will be useful information to have to hand.  

Valuation of assets

Having a good understanding of the value of these assets will be crucial in making decisions on succession planning. Therefore, once a list of owned assets has been created, a market value must be assigned to each of these assets. This should include all owned assets such as land and buildings, shares, cash and also pensions, which will no longer be exempt from Inheritance Tax from 6 April 2027. 

This could initially be done by the individual to gain an approximate value of the assets in order to begin tax planning discussions. However, a formal valuation would be needed for any transfers of assets to be made. Having a valuation of all the assets currently in an individual’s estate will allow for an IHT calculation to be done to quantify their current IHT exposure. 

Review Wills

The Government’s announcement stated that the £1m allowance will not be transferrable between spouses, unlike the nil rate band and residential nil rate band. Therefore, in a situation where a farm is jointly owned between husband and wife, it is important that wills are reviewed to ensure that the allowance is being utilised by each individual upon death. Currently, many wills are likely to leave most assets to their spouse upon death, which will be exempt from IHT. However, as the £1m allowance is not transferrable, it will be wasted upon the first death in this situation.

It is therefore important that wills are reviewed to make full use of the allowance, which may be done by passing the first £1m of APR/BPR qualifying assets to the next generation upon death, using up the full allowance. It is also worth remembering that assets passed on through a will are rebased for Capital Gains Tax purposes. However, gifts of agricultural assets during an individual’s lifetime are not rebased, as any capital gain is usually deferred using Gift Holdover Relief.

Have open discussions with your family

Open conversations will need to be had with family members on the gifting of assets much earlier than under the old regime, to identify opportunities for gifts. It will be important to gain an understanding of each family member’s future plans and wishes when deciding the most practical and beneficial way to distribute assets. In some families this may be clear, however if it is not then it is critical that all parties involved have a clear understanding of the gifts that are being made to avoid any conflict. Gifting assets away will also mean a loss of control of that asset, therefore decisions on what is passed on should not be made lightly. 

Consider lifetime gifts

The new rules will encourage individuals to make lifetime gifts of APR and BPR assets to mitigate the amount of IHT due upon death. Planning the timing of these gifts will be particularly important to ensure they are made early enough so that the individual making the gift is likely to survive 7 years from the date of the gift. In situations where gifting early is possible, surviving 7 years from the date of the gift will result in assets falling outside of the estate and there being no Inheritance Tax due on these assets upon death.

Decisions on making lifetime gifts will be particularly difficult for more elderly individuals where there is more uncertainty about life expectancy. The old regime will be in place until 6^th April 2026, meaning should an individual pass away before this date their estate will be taxed under the previous rules for IHT, with agricultural and business assets given full relief.

Term life insurance should be considered in the situation where an individual is concerned that they would not survive for another 7 years if they were to make a gift now.

If succession is clear, then it is important to consider which assets could be passed onto the next generation and which you wish to retain. A factor that will affect this decision will be reviewing the income requirements of those making the gifts. When an asset is gifted, the individual must not continue to have a right or benefit over the asset, such as still receiving income from it. Failure to do this will result in a gift with reservation of benefit (GROB) and is likely to result in the lifetime gift still being subject to Inheritance Tax. Therefore, the main consideration is to ensure that the individual(s) making the gift retain enough assets to provide them with sufficient income going forward.

A GROB can be avoided where the donee charges a market rent to the donor for any benefit retained from the asset. This could apply in a situation where a farmhouse is gifted to the next generation, but the donor continues to live in the property. This market rent must be paid and therefore the donor must ensure they retain enough cash or other assets to generate an income to make these payments.

Seek professional advice

The changes to APR and BPR will dramatically alter IHT planning for farmers and business owners and will require careful consideration. Therefore, it is recommended that professional advice from accountants, solicitors and land agents is sought to ensure that any actions taken will allow farming businesses to continue to be viable for the next generation.