Selling to developers – how to mitigate inheritance tax on new wealth

Significant changes to the UK’s inheritance tax (IHT) regime are set to take effect from 6 April  2026, particularly impacting Agricultural Relief (AR) also known as Agricultural Property Relief or APR. These reforms will cap the 100% relief on qualifying agricultural assets at £2.5 million, with any value above this threshold receiving only 50% relief . This change will affect the vast majority of farmers and landowners in Kent and East Sussex.

Understanding the upcoming changes

Currently, AR allows for up to 100% relief on qualifying agricultural property, effectively exempting qualifying property from IHT. However, from April 2026, the relief will be limited:

• 100% relief will apply to the first £2.5 million of qualifying agricultural and business property.
• 50% relief will apply to the value of qualifying agricultural and business property exceeding the £2.5 million threshold.

For example, if a person dies owning a farming estate worth £3,000,000 today, it could pass to the deceased’s beneficiaries free of IHT. After April 2026, the first £2.5 million will still pass free of IHT but the remaining £500,000 will only receive 50% relief (meaning IHT will apply at a rate of 20%).

This change means many farming families could face substantial IHT each time the farm is inherited by the next generation. Sadly, because of this, many farmers who had not previously considered this option are now engaging with developers to discuss potential option agreements and the sale of their land.

Developing land and trusts

Many farmers believe selling farmland means they can escape the trap of wishing to pass their farm to their children whilst leaving no liquidity to pay the IHT. Selling the farmland will mean they do not have a farm to leave behind and their children can inherit other assets which can be more easily turned into cash to settle the IHT bill.  However,  the compensation for selling to developers is often so high that this option does not mitigate any IHT and may actually increase the amount paid overall.

So how can you enter into an option agreement to sell development land but also reduce your IHT liability? The answer is to use a trust.

Transferring assets into trust is a way of removing them from your estate (like a gift) but retaining control. Whilst the person who sets up a trust (the settlor)  cannot benefit from it, they can act as a trustee and continue managing whatever assets have been transferred into the trust. If you transfer land to a trust, and survive for the proceeding seven years, the assets will leave your estate for IHT purposes.

There is a limit to the amount you can settle into trust without incurring an immediate IHT charge. For ordinary assets, if the value transferred into trust exceeds your nil rate band (£325,000) or a married couple’s combined nil rate bands (£650,000) if they transfer assets into trust together, there will be an immediate IHT entry charge of 20% on the excess.

For assets qualifying for 100% AR, there is currently no limit on the amount that can be transferred into trust free of IHT (subject to you surviving the transfer by seven years and certain other anti-tax avoidance rules).  However, after 6 April 2026, the limit will be £2.5 million per person before some IHT becomes payable  You should therefore be considering what action to take now.

When negotiating to sell land to a developer, there is a point at which the value of the land significantly increases. This is generally when planning permission has been obtained but the value can increase at other points in the transaction including the point when the land acquires a “hope value”.  Hope value is when an increased value is placed on land to take account of the hope of obtaining planning permission with the “hope value” itself increasing as it becomes more likely that planning permission will be granted.

If land is transferred in to trust early in the process and before the value increases, significantly more land can be given away. From an IHT perspective, a strategic move is to transfer land into trust before it increases in value so that when it does increase in value, all of the increase in value is outside of the settlor’s estate, even if they die within seven years.  This is especially important when looking to benefit from AR alone when transferring land into trust as AR does not apply to the “hope value” of land, it only applies to the agricultural value.

Examples

Farmer A owns 300 acres of qualifying farmland worth £4.8m and a developer has approached him proposing an option agreement and the sale of his land for development. The developer will pay £300,000 for the option agreement and then, if planning permission is obtained, will purchase the land.

No estate planning

If Farmer A dies before 6 April 2026 having done nothing, all his  farmland can potentially pass free of IHT (assuming the farmland has not yet acquired a “hope value”).

If Farmer A dies after 6 April 2026 having done nothing, only £2.5 million will potentially pass IHT free and the remaining £2.3m will be subject to IHT at 20%.  This results in an IHT liability of £460,000 (assuming no other reliefs are available) which needs to be settled from cash within his estate.

Sale to a developer

If Farmer A enters into the option agreement and sells the land, the cash proceeds from the sale of the land will be, for the purposes of this example, £50 million (after the deduction of relevant taxes and expenses).

If these funds remain in Farmer A’s estate until death, £50 million will be subject to IHT at 40% (after any other exemptions and reliefs are applied).

If Famer A decides he now wants to carry out some estate planning, any funds he transfers into trust will incur a 20% entry charge on the value above £325,000 and any transfer into trust or outright gift will require him to survive seven years for it to escape a further IHT charge.

Using a trust

If Farmer A transfers half the qualifying land (150 acres) into a trust, before the value of the land is increased by planning permission or other factors, the land transferred into trust will be worth £2.4m (under the new £2.5 million IHT threshold) and avoid an IHT entry charge. As trustee, he can continue with the option agreement and sale once planning permission is granted.

When the land is sold, half of the sale proceeds are due to the trust which means  the value which is outside Farmer A’s estate and not subject to IHT on his death is £25 million (for the purposes of this example). The remaining sale proceeds belong to Farmer A and can be enjoyed by him during his retirement and used for his care.  Anything that is left in his estate on his death will be subject to IHT at 40% (after any other exemptions and reliefs are applied).

Although there may be an additional charge to IHT if Farmer A fails to survive the transfer into trust by seven years, it will be minimal when compared to the IHT saving achieved by establishing a trust to receive half of the proceeds of sale.

Trust taxation and administration

While trusts can offer significant benefits, they also come with tax charges of their own and administrative costs.  However these charges and costs are generally significantly less than the IHT liability if the assets remain in your estate.

What to do now?

The impending changes to AR represent a significant shift in the landscape of agricultural estate planning with many farmers now considering selling their land to developers. By proactively establishing trusts before agreements are made, farmers and other agricultural landowners have a unique opportunity to safeguard their estates against increased IHT liabilities.  You should therefore take estate planning advice as soon as possible to ensure you can maximise all options available.