Inheritance tax climbdown as Government will set new threshold for farmers at £2.5million

The Government has u-turned on plans to impose inheritance tax on farms worth upwards of £1million, raising the threshold to £2.5million instead.

The change of heart, which is expected to lift most farmers out of inheritance tax altogether, follows a backlash and warnings many families would no longer be able to afford to hand on farms to the next generation.

However, some finance experts say the tax should not have just been amended but scrapped altogether.  

From next April, 100 per cent agricultural property relief will stay for the first £2.5million of combined agricultural and business assets to help protect family farms and businesses.

That will double to £5million for a couple. Above these thresholds, the relief from inheritance tax will be reduced to 50 per cent.

The Government had already announced changes in the recent Budget to permit the transfer of the allowance between spouses or civil partners, but that would only have boosted the threshold to £2million.

Agricultural property relief: This will stay at 100% for the first £2.5million of combined agricultural and business assets to protect farms

You are allowed to pass on farm property if it qualifies for agricultural relief, which is described by the Government as ‘land or pasture that is used to grow crops or to rear animals’.

Sean McCann, chartered financial planner at NFU Mutual, the financial advisory firm, says: ‘Today’s important announcement from the Government will come as a relief to many family-owned farms and businesses across the UK.

‘Together with the change announced in the Budget allowing married couples to transfer any unused allowance between them, this latest move will allow up to £5million in qualifying agricultural and business assets to be passed on free of inheritance tax.

‘While this is a significant improvement on the previous proposals and will take many smaller farms and businesses out of the inheritance tax net, it will still leave many farming and business owning families facing a large inheritance tax bill.

‘Although farm asset values can be high, the returns are often low. In many cases we could still see land and buildings having to be sold on the farmer’s death to pay the tax bill, with the next generation inheriting smaller less efficient farms as a result.’

Danni Hewson, head of financial analysis at investment firm AJ Bell, adds: ‘Thousands of farmers and family-owned businesses will be celebrating on news the Government has announced a retreat on its inheritance tax plans after months of protests.

‘For months the Government had been accused of being tone deaf when it came to the impact inheritance tax changes would have on jobs and livelihoods, with many farmers and business owners warning of the potential impact on local communities and supply chains.

‘This decision will feel like an early Christmas present for those who had been forced to consider scaling back investment, selling off assets, or even selling the entire business with the potential for huge job losses.

‘The Government has promised to deliver growth and today’s climbdown shows that they have been listening, but it follows months of uncertainty and worry about whether the next generation would be able to take over businesses that their parents had worked hard to create.’

Toby Tallon, tax partner at S&W, says: ‘The reduction in inheritance tax relief first announced in the October 2024 Budget left many living under a cloud of uncertainty as to whether they had a future.

‘Farms and businesses that had been in families for generations faced mortgaging their future growth prospects or having to sell up to pay huge bills on the current owner’s death.

‘The change of heart from the Government will be gratefully received by many of our clients, after two Budgets that did little to spread good cheer.’

But he adds: ‘It’s another step in the right direction, but there is still a long way to go to provide the support our farmers and small business owners need to thrive for generations.

‘Restricting the inheritance tax reliefs on the transfer of qualifying family businesses and farms is an act of economic self-harm akin to imposing tariffs on your domestic industry.

‘At a macro level it will result in lower tax revenue, fewer jobs, and lower economic growth. At an individual level, it puts businesses, their employees and their owners under significant stress and risk.

‘In my view, and many others, it’s simply a bad policy that should be scrapped, not just amended.’