Capital Gains Tax and Inheritance Tax on agricultural land and farms

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Selling or transferring agricultural land and farms can have significant tax implications, particularly concerning Capital Gains Tax (CGT) and Inheritance Tax (IHT). Given the changes announced in the Autumn Budget 2024, it is important to consider the current rates and the implication of future increases.

Capital Gains Tax

Capital Gains Tax (CGT) is charged on the profit made from selling an asset, including agricultural land and farms.

• Calculation: The gain is calculated as the difference between the sale price and the original purchase price, minus allowable expenses such as legal fees and improvement costs.
• Rates: The Chancellor has brought the CGT rates for chargeable assets in line with residential property, effective for disposals made from 30 October 2024. These rates have been increased from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher rate taxpayers, meaning the same rates are now applicable to both residential and non-residential properties, as well as other chargeable gains.
• Exemptions and reliefs:
  • Annual Exempt Amount: Each individual has an annual exempt amount which has been reduced over recent years to £3,000 in 2024/25 (£6,000 in 2023/24)
  • Business Asset Disposal Relief (BADR): This relief can reduce the CGT rate to 10% on qualifying business assets, including farms, up to a lifetime limit of £1 million. This rate will increase to 14% in 2025/26 and 18% in 2026/27. Any remaining gain will be taxed at 24% from 30 October 2024.

 

Inheritance Tax

Inheritance Tax (IHT) has seen one of the biggest changes following the Autumn Budget.

IHT is charged on the value of an estate passed on after death. The standard IHT rate is 40% on the value above the nil-rate band of £325,000, topped up to £500,000 if you leave your home to your children or grandchildren and your total estate is valued under £2 million.

Two reliefs are potentially available to those selling agricultural land and farms -  Agricultural Property Relief (APR) and Business Property Relief (BPR). Previously this applied to the whole value of the qualifying asset but the Autumn Budget set the combined relief cap for APR and BPR at £1 million which is due to come in from 6 April 2026.

• Agricultural Property Relief

APR can still significantly reduce the IHT liability on agricultural land and buildings. It applies to agricultural property occupied for agricultural purposes. This includes land, buildings, and farmhouses proportionate in size and character to the agricultural land.

APR can provide up to 100% relief on the agricultural value of the property up to £1 million with any amount above this receiving 50% relief. To qualify, the property / land must have been owned and used for agricultural purposes for at least two years (if occupied by the owner) or seven years (if occupied by someone else).

• Business Property Relief

BPR can also reduce IHT on business assets, including farms. To be eligible the farm must be a working business, not just an investment. BPR applies to both the land and buildings used in the business.

BPR can provide 100% relief on the value of the business property up to £1 million if it has been owned for at least two years before the transfer with any amount above this receiving 50% relief.

• Combining APR and BPR

In some cases, it is possible to combine APR and BPR to maximise tax relief but the combined relief is restricted to £1 million. For example, APR can be applied to the agricultural parts of the property, while BPR can be applied to the business elements.

Unlike the IHT nil-rate band, any unused APR/BPR allowance will not be transferable between spouses or civil partners.

In light of the proposed changes to APR and BPR, effective succession planning has never been more crucial. Ensuring a smooth transition of your agricultural land and business assets can help maximise tax reliefs and secure the future of your family business, and the earlier planning is undertaken, the greater the chance of success.