Implications of Tax Adjustments for Northern Ireland Farms

This week, thousands of farmers demonstrated against modifications to inheritance tax (IHT) that were revealed in the Budget. They contend that imposing a £1m cap on Agricultural Property Relief (APR) has the potential to terminate family farming practices in Northern Ireland and jeopardize food production. The question arises as to the precise number of local farms that might be impacted. Agricultural Property Relief (APR) was established in 1984. From its inception, agricultural land and associated properties, such as farm buildings and residences, have been exempt from IHT. This measure was designed to prevent the fragmentation of farms and the sale of assets to cover tax liabilities, a scenario that could potentially hinder risk-taking and entrepreneurial activity within a sector deemed vital to the economy. Additionally, Business Property Relief (BPR) offers an exemption for farm machinery, livestock, and equipment. During the budget presentation last month, the chancellor declared that both APR and BPR would be subject to a joint cap of £1m, with any amount exceeding this threshold incurring a tax of 20%, which is half the standard IHT rate. This alteration is scheduled for implementation starting April 2026. While the threshold appears substantial, land values in Northern Ireland average nearly £14,000 per acre, and the typical farm size is 100 acres. Consequently, the cap is rapidly surpassed. Cormac McKervey, Ulster Bank’s head of agriculture, noted that land prices exhibit significant variation. He stated that, as reported by the Irish Farmers Journal, land with existing buildings sold in 2023 commanded a value of £18,000 per acre, with land quality also influencing the price. Concurrently, estate agent Libby Clarke commented that prices invariably rise. She added: “There’s the old saying, they never make any more land, so land values have consistently been going up and the majority of buyers are farmers.” Approximately three-quarters (73.7%) of Northern Ireland’s land is utilized for farming. Among the 26,131 farms located in the region, 20,603 are categorized as “very small”. Inheritance Tax (IHT) is only levied upon the inheritance of land, making it challenging to forecast the annual number of affected farms. Nevertheless, based on a straightforward calculation involving land with buildings, Mr McKervey suggested that “many” farms could fall within the IHT category. A farmer possessing 100 acres would own land valued at £1.8m, prior to the inclusion of livestock or machinery. This valuation would place them £800,000 above the specified threshold. Mr McKervey remarked: “There are other reliefs and you may qualify, but if you assume you don’t, then 20% inheritance tax is £160,000.” Concurrently, studies conducted by Northern Ireland’s Department of Agriculture, Environment and Rural Affairs (Daera) have suggested it would be “reasonable to assume” that agricultural land will be appraised at approximately £15,000 per acre in 2026. This valuation implies that 27 hectares, or roughly 67 acres, would correspond to an agricultural worth of £1m, thereby bringing “around one third” of farms within the purview of inheritance tax. One third represents approximately 8,700 farms, according to the 2023 farm census. The dairy industry faces the most severe impact, with about 75% of its farms potentially falling into the inheritance tax category. The research further states that the £1m cap “does potentially bring a significant number of farms into the scope of inheritance tax and is much higher than the 4% to 7% of estates likely to be liable for inheritance tax generally over the forthcoming period”. During her budget address, Chancellor Rachel Reeves conveyed her understanding of “the strongly held desire to pass down savings to children and grandchildren” and affirmed that she was adopting “a balanced approach”. The Treasury projects that, throughout the UK, approximately 500 farms will be impacted annually, according to data from HMRC. Furthermore, it anticipates generating an extra £230m in the initial year of the change, increasing to £520m by 2029/30. An attempt by the Department for Environment, Food and Rural Affairs to mitigate the proposed changes was declined by the Treasury. Given the well-known complexity of tax legislation, obtaining financial and legal counsel is essential. Farmers are entitled to the same £325,000 IHT allowance that is universally applicable. Regarding the £1m cap on APR, a cumulative impact may arise if a farm is transferred successively from spouse to spouse to child, contingent on the will’s formulation. Land may be gifted, provided the donor survives for seven years following the transfer. Should land be gifted between the present time and April 2026, and the donor passes away within that period or within 7 years, the £1m cap on APR and BPR will nonetheless be enforced. Farmers also possess the alternative of settling an IHT bill across a 10-year period. However, Mr McKervey contends that the ongoing necessity to invest in farms – to fulfill climate change commitments, environmental mandates, or farm quality standards – will present them with a difficult decision. Mr McKervey stated: “Potentially you sell a portion of the land – that clears the tax bill but you’re now left with a smaller, less productive, less sustainable business.” He continued: “Or you might say, ‘okay, the normal repair and maintenance that I might do on my farm each year, I’m going to stop that and divert the money to my tax bill’.” Or, he added, the farmer approaches the bank requesting: “‘I have a tax bill of £160,000, so I want to borrow that money over 10 years’.” He explained: “The farm isn’t generating any more profit because it’s the same size it always was, but you now have £160,000, costing £20,000 or £22,000 a year with interest.” He has computed the return on investment from 100 acres, valued at £18,000 per acre, to be £34-36,000, which he asserts provides “no room” for sourcing the necessary funds.