A year of change for farms and family businesses

New year is a time to look back and review the past year and to look forward to the year ahead.  The budget in October 2024 made 2025 a difficult year for many. The uncertainty caused by the new rules limiting agricultural and business property relief for farmers and small businesses, has led a lot of people to question how they were going to make ends meet and keep farms and businesses together. 

To recap, the government has introduced a limit on the amount of agricultural and business relief that could be claimed.  Previously this had been unlimited and therefore any value of agricultural or business asset was subject to relief.  In October 2024, a limit of £1m was introduced, so that only the first £1m was fully exempt, the rest being taxed at 20% (or half the main rate).  The government were adamant that no changes would be made.

However, some relief came in the budget in November with the announcement that the £1m would be transferable between spouses, so that it was not necessary for each spouse to own assets worth £1m to use the reliefs.  Further, it appears possible to transfer allowances from spouses who have died earlier, so a widow can benefit from a double allowance.

Then came yet another change, just in time for Christmas; the limit is being raised to £2.5m, again transferable.  Therefore, a couple with a farming business of £5m will now be free of tax, rather than the limit being £2m.  The draft legislation has yet to be updated but presumably that will happen and no further changes will be made before it’s due to take effect on 6 April.

Whilst the changes are welcome to reduce the tax burden on smaller farms, it would have been helpful if they had been incorporated in the initial drafting to avoid the stress and anxiety caused.

So where do the changes leave the need for planning?  £5m is still a relatively small amount when land and machinery values are considered and therefore it is still important to consider inheritance tax and whether it can be mitigated.  For smaller businesses, the changes to the rules have been useful to encourage people to think about succession planning.  Tax is only one consideration; it is also important to consider how a farm or business will operate in the future and who will run it.  If the aim is to hand over to one or more children, then the whole family should understand that and what it means for them now and in the future.

It is never too soon to begin discussions about succession, and it is always sensible to take good advice to help steer those conversations.