Were farmers the worst hit by Rachael Reeves’ Budget

QUESTION: Were farmers the only business group adversely affected by the budget?

ANSWER: Farmers have been seriously affected by the budget with their farms now subject to inheritance tax (IHT) where previously they were completely exempt.

The National Farmers Union has been lobbying strongly against the proposed IHT measures which take effect from April 2026.

However the IHT budget change affects all business and not just farmers, because both agricultural property relief (APR) and business property relief (BPR), have been reduced to 50% (from 100%), after a new exemption of £1 million.

The reduction in BPR to 50% will affect all business owners whether they operate as a sole trader, are a member of a partnership or a shareholder in a limited company.

A further adverse budget measure was the increase in the rate of capital gains tax (CGT) from 10% to 18% (basic rate taxpayer) and from 20% to 24% (non-basic rate taxpayers).

The rate which applies to the disposal of business assets (business asset disposal relief or ‘entrepreneurs’ relief’), will increase from 10% to 14% in April 2025 and then up to 18% in April 2026.

Entrepreneurs’ relief was once worth £1m in tax saving and will now be only worth £60,000 from April 2026.

The reduction in BPR to 50% presents a challenge to family businesses.

Take a construction company with some residential landbank owned by a married couple with the business valued at £5m.

Without any tax planning, on the death of the second shareholder, there will be an IHT charge of £670,000, ignoring any other assets.

This IHT must be paid before the beneficiaries of the deceased can assume control of the company.

How is this to be funded given that it will not be possible to leverage the company’s assets prior to paying the tax?

Tax planning is therefore essential in these circumstances and if both parents re-write wills, then there is the possibility to have up to £3m of IHT relief.

For estates larger that £3m, the only other option is to make lifetime gifts of shareholdings which can still be done avoiding an immediate CGT charge, as both the transferor and transferee can elect to defer the CGT charge via a joint election.

Such a lifetime gift requires the transferor to survive the gift by 7 years for it to completely fall out of their estate for IHT.

Many parents are wary however of making absolute gifts in their lifetime in case the beneficiary experiences an adverse lifetime event (death, divorce, mental incapacity etc) and for this reason trusts have become much more prevalent in recent years. A shareholding can be transferred into trust and CGT can also be avoided in the same way as above with the 7-year rule also applying to the transfer. Trusts carry a 10-year charge however which used to be zero for business assets but which is now effectively 3% so care needs to be taken before settling assets into trust that the people making the settlement fully understand all of the tax implications of creating and operating a trust.

• Paddy Harty ([email protected]) is tax partner at AAB Group Accountants Ltd (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.