Farmers are up in arms across the country following Chancellor Rachel Reeves’s changes to inheritance tax rules for farms in the Autumn Budget.
Thousands descended on London in protest against the changes, as Jeremy Clarkson said the rules would prove ‘the end’ for many. Despite the controversy, Labour MPs voted through the inheritance tax raid on farms this week.
While the petrolhead TV star turned celebrity farmer might have been at the forefront of protests hitting the streets of London, by his own admission it is not the genuinely wealthy like Clarkson who would prove to be the ones truly losing out to the tax changes.
Instead, it is cash-poor but asset rich farming families who fall through the cracks of the new rules that may be forced to sell off parts or all of their farm in order to fund inheritance tax charges.
The changes were intended to close a loophole for wealthy investors buying up farmland, and yet it is not these people that will face the greatest impact of the new rules.
Critics say investors may opt to sell farmland and move money elsewhere, or hold onto it, as it still benefits from a 50 per cent discount on inheritance tax. In contrast, for farmers land is an essential ingredient of their business and way of life, which in many cases has been passed down the generations.
Those affected have gone from a long-running inheritance tax exemption to facing big bills for death duties, so the move has been hugely controversial.
Meanwhile, the government’s figures on the impact have been called into question. We take a look at what the inheritance tax changes mean for farmers, what they can do – and whether there is any chance the new rules might change?
Clarkson’s Harm: TV star Jeremy Clarkson speaks out against the damage of the inheritance tax changes during the farmers’ demonstration
Inheritance tax and farmland – the new rules
Under the new rules, farmers will lose 100 per cent relief on inheritance tax on agricultural property and business assets.
From April 2026, agricultural and business inheritance tax reliefs will be restricted. Estates will only get full inheritance tax relief on the first £1million of combined business and agricultural assets. Above that they will get a 50 per cent relief on the tax rate, meaning inheritance tax will effectively be charged at 20 per cent on assets above the £1million threshold.
This is still beneficial compared to the 40 per cent rate charged elsewhere. Farmers and landowners will also get the standard inheritance tax-free allowance of £325,000 for an individual plus an extra £175,000 if their own residence is passed on to a child or grandchild.
The £1million agricultural relief is per farm owner, so could be doubled up by a married couple, but only if both are still alive and those whose partner is already deceased cannot use any of their unused amount, as with standard IHT allowances.
In order to qualify for this agricultural property relief, farms must have been owned and used for agricultural purposes for two years if farmed by the owner, or for seven years if rented to a farmer.
The eventual inheritance tax bill is payable over a 10-year period, without interest accruing on the outstanding tax. For some, this means that that saving or borrowing could be used to avoid having to sell assets to meet these payments.
Why target farmers on inheritance?
The changes come as the new Government looks to prevent farmland being used as an inheritance tax-dodging investment opportunity by the very wealthy looking to protect against a hefty tax bill on their estate at death.
But it has come in for heavy criticism as it treats those who farm and investors in land in the same way, making no distinction between farmers and those who bought farmland for inheritance tax benefits.
Sam Dewes, private client partner at HW Fisher, said: ‘While there is some sympathy with the aim of preventing very wealthy taxpayers from claiming APR on valuable land without adding to the rural economy, many farmers – who are often asset-rich but cash-poor – will never actually realise the value from their land whilst they continue to farm it.
‘To protect multi-generational farming families, the proposals could be amended to only limit APR on death when the farm is sold afterwards. That way farmers who hope to continue the business aren’t forced to sell up to pay for the tax.’
Less than half of farmland sold now goes to farmers, with private and institutional investors now taking a large chunk, Strutt & Parker’s English Estates & Farmland report reveals
As sales to farmers have fallen, the price of farmland has risen substantially – massively outstripping farmers’ profits and driving down yields
The number of investors purchasing farmland has increased in recent years, with just 31 per cent of land purchases so far this year having been made by farmers, according to data from Strutt & Parker.
Previously, farmers and business owners have been fully exempt from inheritance tax thanks to agricultural and business reliefs, which gave 100 per cent relief on these assets.
This relief has been in place for 40 years and was specifically designed to stop family farms having to be broken off or have parts sold off to pay death duties. Many farms are passed through the generations to those willing to take them on and land is an essential element for farming but profits tend to be small.
Meanwhile, farms are struggling for income due to high costs, the impacts of climate change and the shift away EU subsidies after Brexit. Farmers are angry as promised new payments have not properly materialised.
Craig Rickman, personal finance expert at Interactive Investor, told This is Money: ‘It’s not going to affect all farms, but for those that it does affect the tax penalties could be could be quite painful. Although some farms have some pretty serious value to them, not all farmers have cash available.’
How many farms will be affected?
According to the Treasury, these measures could rake in more than £230million for the tax man in its first year and £520million a year by 2029.
While Treasury figures claim only 500 or so farms will be affected per year, this is almost a third of the 1,800 current claims for agricultural relief. Over the course of a decade, 5,000 farms would be affected, which compares to just over 200,000 farms in total across the country, according to Defra.
The Treasury says only 28 per cent of farms will be affected but one of the major controversies around the inheritance tax raid surrounds these figures on its impact. The National Farmers Union says that Defra’s own figures contradict this, stating that around two-thirds of farms are worth more than £1million and therefore potentially affected.
An Institute for Fiscal Studies report said:’However defined – and therefore whatever the proportions – it is clear that some farms will be able to be passed on tax-free, while others will attract inheritance tax.
‘Those farm owners who do not have a (surviving) spouse or civil partner, or who face a higher chance of dying within seven years, have less ability to manage their affairs so as not to pay inheritance tax.’
Farms worth £3million can be passed on tax-free if all conditions are met and the farmhouse is left to direct descendants
Can farmers really pass on farms worth up to £3M?
While IHT is now set to be charged on farm assets above £1million, some farmers could increase this threshold up to £3million in certain circumstances.
For a farm jointly owned by two people, they can combine both of their initial £1million tax free agricultural property allowances, along with their standard £325,000 nil-rate inheritance tax band and £175,000 residence nil-rate band.
This requires them to pass £1million each of farm assets on at their death, while also using the maximum £1million combined inheritance tax-free allowance for a married couple or civil partners to pass on their wealth and own home to children or grandchildren.
But their individual estate must not be more than £2million, otherwise they will start having their residence nil-rate band removed.
In total, this means farms worth £3million can be passed on tax-free if left to direct descendants. For non-direct descendants the farm would still be tax free up to £2.65million, as the residence nil-rate bands would not be available.
It is worth noting that some farms won’t qualify for these extras if they don’t have a home on the farm or one worth enough to benefit, or if they are unmarried or don’t have a surviving spouse or civil partner.
Crucially, couples passing on assets worth £3million must do so separately, passing the first £1million allowance to a descendant when one member of a couple dies, as this allowance cannot be used by the surviving spouse.
Critics have attacked the complexity of these scenarios when ministers have put forward the £3million figure as a reason why most farmers should not be concerned about inheritance tax.
They also create a scenario where farms may end up jointly owned for a period of time by different members of a family, who may hold opposing views on how the farm should be run.
Family farms are also not always passed to children or grandchildren, sometimes they go to whichever family member is willing to be a farmer.
The IFS said: ‘A typical couple might expect to be able to use both of their £1 million allowances. But people will not inherit any unused part of the £1 million allowance from a deceased spouse or civil partner, like they do with the nil-rate band and residence nil-rate band.
‘So, to use both partners’ allowances, each must separately bequeath at least £1 million of the property to others (e.g. children).
‘That means splitting ownership of the property between family members on or before the death of the first partner, rather than bequeathing the whole thing when one of them dies. It will also disadvantage families where one member of the couple has already passed away.
‘There is a good case for making unused portions of the £1 million allowance inheritable by a spouse or civil partner.’
Protest: Farmers took to the streets of Westminster to demonstrate against the Government’s tax changes
What about business relief?
Some farmers have also previously used Business Property Relief on some of their farm’s assets.
In order to make use of BPR, a farm must be a working business that has been owned for at least two years before the transfer.
The business must not mainly make holding investments or deal in land or buildings. This means that farms purchased for investment purposes do not qualify as trading businesses.
However, under the new rules both APR and BPR fall under the same £1million allowance from 2026, meaning that farmers cannot benefit from both.
How can farmers mitigate their tax bill?
Aside from making use of the available reliefs to the greatest possible extent, there are ways that farmers can plan ahead to cut their inheritance tax bill.
Farmers can make use of the seven year gifting rule to pass their farm on long before they die so that it is free from inheritance tax.
However, if a farmer still lives and farms on the property, then this may be considered a gift with reservation of benefit, meaning that inheritance tax could still be chargeable.
To prevent this, the owner could only pass on some of the farm and then not derive a benefit from that part, although this may seeriously impact their income.
If handing over the entire farm and house, they would need to move out of the property or pay a market rent, and not take income from the farm.
With the clock starting now on gifts for something that was previously inheritance tax-free, understandably those whose spouses may have already died, or are in ill-health, and are unable to make use of the seven year rule feel put out by the new rules.
The IFS, which broadly supports the inheritance tax changes, said that the government should consider changing this.
It said: ‘If the government wished to give current farm owners the same opportunity to avoid inheritance tax that owners of other assets have, it could do so by transitioning to the new regime more slowly.
‘For example, lifetime gifts of agricultural property made before a certain future date could be made inheritance tax free, regardless of the timing of the death of the giver, so that those farm owners who pass away in the next seven years have an opportunity to make tax-avoiding gifts in light of the Budget changes.
‘This would reduce the revenue raised from the policy, but this would be one-off, rather than permanent, reduction in the revenue raised.’
Farmers also face a potential capital gains tax if the value of the farm has increased since you acquired it. Typically, the farmhouse, as a main residence, would be exempt from this, benefitting from Principal Private Residence Relief, but other properties, assets and land may not be.
The farm could qualify for holdover relief, which means the CGT liability passes to the recipient of the gift to pay on the total gain when they eventually dispose of the property.