Inheritance tax reforms: government urged to rethink curbs on rural reliefs

The government is facing pressure to delay controversial inheritance tax reforms that are set to hit farmers next year.

Chancellor Rachel Reeves has faced fury from farmers after she used her Autumn Budget to slash agricultural property relief (APR) for inheritance tax.

The changes, which may also affect investors who have purchased land for their portfolio as part of their IHT planning, are due to be introduced from April 2026.

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The relief, which has been around since the 1980s, helped farmers and landowners pass on land and assets to the next generation and avoid inheritance tax or at least reduce the liability.

The cost of APR has surged by £335 million or 105% since 2020 to £665 million, which explains why the government wants to restrict it as part of plans to balance the public finances.

But campaigners and rural groups have warned that the changes will destroy family farms and have questioned Treasury claims that the majority of farms won’t be affected.

MPs have now stepped in to urge the government to delay the reforms.

The cross-party Environment, Food and Rural Affairs Committee claims the changes have been introduced without adequate consultation, impact assessment or affordability assessment.

Alistair Carmichael, chair of the committee, said: “We have seen that Defra’s communications with farmers have been poor, with confusing and sometimes contradictory messaging. There has been a lack of adequate consultation. Policies affecting farmers have been announced without due consideration or explanation of their impact or their rationale.

“Farmers ought to be the essential element in the Government’s plans both to achieve food security and to restore and protect the environment. When they make decisions for their businesses, farmers have to plan for the long term – but the landscape they are operating in currently is unclear.

“Farmers urgently need clarity, certainty and advance notice of changes –they cannot be expected to rethink their businesses on a whim. It is essential that Defra focuses on rebuilding trust through good-faith communications with the sector.”

What is agricultural property relief?

Currently, an estate that contains farmland and assets will receive 100% IHT relief using APR as long as it was actively farmed for more than two years.

The relief is 50% for land owned between 10 March 1981 and 1 September 1995.

This is a valuable relief for famers as land and assets such as buildings and tractors as well as crops can be worth a lot of money.

The idea of the relief is that future generations could continue operating without the pressure of selling due to a large IHT bill.

There is also business property relief (BPR) for business assets that are part of someone’s estate when they pass away.

Reeves announced in her Budget that the relief will be restricted to the first £1 million after 6 April 2026.

This applies to combined agricultural and business property reliefs.

Above this amount, landowners will pay inheritance tax at a reduced rate of 20%, rather than the standard 40%.

This tax can be paid in instalments over 10 years interest free, rather than immediately, as with other types of inheritance tax.

It is also on top of other exemptions such as the £325,000 nil-rate band, the £175,000 main residence allowance and being able to pass assets to a spouse tax-free.

The changes have prompted protests from rural groups who have accused the government of breaking manifesto pledges to support farming communities.

Alternatives to agricultural property relief clampdown

The Treasury claims that the majority of farms won’t be affected and suggests that two people with farmland, depending on their circumstances, can pass on up to £3 million without paying any inheritance tax.

But the committee’s report warns that the government hasn’t listened to industry concerns and should delay reforms while it considers further information.

There are also concerns about the Treasury’s own impact assessment.

The National Farmers Union (NFU), citing Defra figures, has argued that around two thirds of farms are worth over £1 million and are therefore potentially affected.

The Institute of Fiscal Studies (IFS) said the number of farms likely to be affected by the changes to APR and BPR can differ depending on the data used.

For example, HMRC data relates to the number of taxpaying estates, while figures from other organisations assessing the potential of impact of the change relates to current farms and farming businesses.

Additionally, inheritance tax returns reported to HMRC relate to all estates claiming agricultural relief, while the Defra figures from the Farm Business Survey relate only to farms with at least a minimum level of output.

Solutions put forward by MPs include increasing the tax-free APR/BPR combined cap to £20 million but with a ‘clawback period’ for any land sold after being passed on.

The report also proposes allowing lifetime transfers of qualifying agricultural or business property, usually set at seven years, to be immediately exempt for a short period to allow elderly owners to reorganise their estates, before coming back into force.

The report concludes: “The government should delay announcing its final APR and BPR reforms until October 2026, to come into effect in April 2027, to provide more time for farming businesses to conduct succession planning and seek appropriate professional advice.

“The government should use this time to consult on its proposed changes, conduct an impact and affordability assessment, and consider policy measures and mitigations to reduce any unintended negative consequences.”

Tom Gauterin, director of law firm Freeths, said there are plenty of other ways investors using farmland as a tax shelter could be targeted including the clawback suggested by MPs.

He said: “There would be no shame in the government listening and accepting that their original policy didn’t work as intended. It remains to be seen whether the hard realities of policymaking are something they intend to engage with."