Login
With a new £1 million cap on Agricultural Property Relief (APR) and Business Property Relief (BPR) due to take effect from April 2026, the value of tenancies will play a more critical role in inheritance tax calculations. Head of Agriculture Nick Banks takes a look at how the changes will introduce a new layer of complexity for tenant farmers significantly impacting how they approach estate planning.
For as long as I’ve been in practice, the value of a tenancy to a tenant has likely come up when talking about the compensation payable on the surrender.
Occasionally I’ve seen probate applications include a value for a tenancy, but this has always been covered by 100% Inheritance Tax relief.
But with the changes to Agricultural Property Relief (‘APR’) and Business Property Relief (‘BPR’), announced in the Autumn 2024 Budget, this is set to change.
Tenant farmers, like all other farmers, hold working capital which has a value. This will include their plant and machinery, crops held in store, the value of their growing crops and the other working capital of the business.
It would typically be expected for the tenant farmer’s business to qualify for BPR and therefore, prior to 6 April 2026, the value of this working capital to qualify for 100% Inheritance Tax relief.
If the farmer attributed a value to their tenancy this would also have been expected to qualify for APR and therefore 100% IHT relief.
From 6 April 2026 though, an individual’s entitlement to 100% APR and BPR will be capped at £1m. 50% relief will apply on the balance of value above £1m, meaning an effective IHT rate of 20%.
Bringing the value of tenancies into sharp focus.
Taking an example to illustrate the point:
David farms 500 acres under an Agricultural Holdings Act tenancy. The working capital of David’s farming business is worth £250k.
If we assume the tenancy is worth £5k per acre, David’s assets are worth:
Working capital of business £250,000
Tenancy £2,500,000
Total £2,750,000
Assuming David undertakes no planning and dies before his son Robert succeeds to the tenancy, and assuming the other assets in David’s estate consume his IHT nil rate band, the above assets would carry an IHT liability of £350k.
Paying this liability interest free over ten years leaves an annual cost to the business of £35k.
And here lies the first challenge. David’s successors cannot sell some land to pay this tax, as has been suggested in some circles since the Budget. They could look to surrender part of the tenancy to raise capital, however this is unlikely to raise enough to make it worthwhile.
The second challenge is that tenancies are difficult to plan around, in traditional estate planning terms.
Some farming businesses are undertaking estate planning which focuses on utilising the £1m cap for APR and BPR of both a husband and wife, to ensure they fully relieve £2m of qualifying assets.
This is likely to be challenging in David’s case, given that it’s unlikely that David would be able share ownership of the tenancy with a spouse, without disturbing the tenancy itself.
Many landowners are looking at passing assets down a generation via lifetime gifting. But this is also difficult with a tenancy, compared to assets owned outright, as passing the tenancy down would typically require a succession, which is likely to have wider implications on the tenancy itself.
What to do next?
We’ve been discussing many of these cases with affected clients and working hard to support them ahead of the changes next year.
I suspect our land agent friends will be busy in the meantime providing valuations of tenancies to support estate planning.
But, we’re here to help with advice and support for both your business and personal finances. So, if you’re facing this issue and unsure what to do next then please call us on 0330 058 6559 or email hello@scruttonbland.co.uk
Back