Inheritance Tax For Farmers: What Now?

In the autumn budget of 2024, the chancellor announced changes to inheritance tax reliefs. From April 2026, taxes would apply to agricultural assets over £1 million – or up to £3 million in certain circumstances – so the government stated that this would affect the wealthiest landowners and discourage people from purchasing agricultural land solely to avoid tax. However, farming groups have argued that this policy is not just a threat to family farming. It also poses a risk to the UK’s food security because it could make it harder for farmers to pass land down to the next generation.

Changes To Inheritance Tax For Farmers

The government has announced reforms to agricultural property relief (APR) and business property relief (BPR) from inheritance tax. A technical consultation will be published by early 2025, with the reforms planned for April 2026. Presently, APR and BPR are available either at a rate of 100% or 50%, depending on eligibility criteria. There is currently no cap on the total amount of relief.

From April 2026, inheritance tax relief for business and agricultural assets would be capped at £1 million. Any amount above this will be subject to a reduced tax rate of 20% instead of the standard 40%. The tax would be payable in instalments over 10 years at no interest.

The Treasury has set out that full exemptions for transfers between spouses and civil partners would continue to apply. There are also nil rate bands for inheritance tax which people would retain access to on top of the £1 million. A nil rate band is an amount of an estate that can be passed on free of inheritance tax. The tax-free allowance for residences is £175,000 per person. Each person also has £325,000 tax-free allowance that can be applied to all types of assets.

The government has confirmed that the valuation of an estate would include non-residential agricultural buildings, farm vehicles, farm tools, livestock, chemicals, and fertiliser stock.

Any transfer to individuals more than seven years before death would continue to fall outside the scope of inheritance tax. The rate tapers down from three years after the transfer.

How Will This Affect You?

For farmers, this reform to inheritance tax reliefs can have significant implications. Agricultural land and assets often constitute a substantial portion of their estate. To ensure that you will not be unduly burdened by the new legislation, it is important to understand the nuances of inheritance tax and how it may affect you.

Agricultural Property Relief (APR) reduces the value of agricultural property for inheritance tax purposes. This often results in a significant reduction in taxable value. To qualify, the property must be used for agricultural purposes and meet certain criteria. This includes land, buildings, and machinery used in farming.

The relief typically applies to:

• Land and pasture used to grow crops or rear animals
• Farmhouses, cottages, and farm buildings
• Livestock and machinery

Business Property Relief (BPR) refers to if the farm is run as a business, which it may qualify for business relief. This reduces the value of the business assets for inheritance tax purposes.

To qualify for BPR, the farm must be a trading business rather than an investment. This means that the primary purpose of the farm should be to generate profit through agricultural activities. Business relief can apply to:

• Land and buildings used in the farming business
• Shares in farming companies
• Machinery and equipment used in the business

How Many Farms Will Be Affected?

Based on HMRC tax data, the government predicts that out of the 1,800 estates per year claiming agricultural relief (including those who claim business relief as well), around 500 (29%) could potentially pay more inheritance tax as a result of curtailing agricultural and business reliefs.

However, these figures do not account for any behaviour change that happens as a result of the Budget policy measures. In reality, the number of farming estates paying more tax due to the new Budget policies could be a lot lower than 500 per year if people change their behaviour to avoid inheritance tax. This can look like farm-owning couples splitting the transfer of assets to the next generation across their two estates to take full advantage of both spouses’ allowances, or if there is increased gifting of assets more than seven years before death.

The reforms to the taxation of agricultural property proposed in the Budget would minimise the inheritance tax advantages enjoyed by owners of farmland but would still leave that land much more lightly taxed than most other assets. With the right tax planning, it is possible to ensure that many farms worth considerably more than £2 million will not be liable for tax.

How We Can Help

Given the complexity of inheritance tax laws and the significant value of agricultural estates, farmers should seek professional advice. Estate planning specialists, tax advisors, and legal professionals can provide tailored advice and help implement strategies to protect your farm and minimise tax liabilities.

Keen to learn more about the implications of inheritance tax for farmers? Contact our Wills, Trusts, and Probate team to help you with your agricultural estate planning.