Changes to inheritance tax (IHT) relief on farmland are among the most controversial policies to have been launched by the Labour government.
Chancellor Rachel Reeves used her Autumn Budget to slash agricultural property relief (APR) for inheritance tax, which farmers and rural groups warn will destroy family farms.
The changes may also affect investors who have purchased land for their portfolio as part of their IHT planning.
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The cost of APR has surged by £335million or 105% since 2020 to £665 million, government data shows, which explains why the Treasury may be so keen to restrict it.
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The National Farmers Union (NFU) and other groups as well as independent farmers have held protests across the country, with major rallies in Westminster - and speeches by Jeremy Clarkson - to raise concerns about the IHT changes.
What is agricultural property relief?
Agricultural property relief (APR) has been around since the 1980s, helping farmers and landowners pass on land and assets to the next generation and avoid inheritance tax or at least reduce the liability.
Farm land and assets such as buildings and tractors as well as crops can be valuable so the idea of the relief is that future generations could continue operating without the pressure of selling due to a large IHT bill.
Currently, an estate that contains farmland and assets will receive 100% IHT relief 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.
There is also business property relief (BPR) for business assets that are part of someone’s estate when they pass away.
But as part of plans to plug public finance shortfalls, 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.
Charlene Young, pensions and savings expert for AJ Bell, says agricultural and business property relief combined saved wealthy families from paying IHT on around £4.4 billion of assets in 2021/22.
“BPR was worth £2.9 billion and used by 4,170 estates, making it the second most valuable of all the IHT reliefs,” she says.
“These reliefs are designed to prevent family-owned businesses and farms being faced with the pressure of stopping trading or being sold to fund IHT bills.
“In some cases, sizeable tax bills will mean families end up selling businesses, taking out a new mortgage, or getting a loan to pay the IHT bill.”
Why are farmers protesting about agricultural property relief changes?
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 rural campaigners dispute this and have accused the government of breaking manifesto pledges to support farming communities.
"The government campaigned on a promise to give ‘our rural communities their future back’ and were adamant that they would not change agricultural property relief,” says Rupert Burchett, agricultural property solicitor at Payne Hicks Beach.
“These proposals directly contradict those promises.
“Even if you just use bare agricultural land values, 40% of farms will be affected. When you add on the value of farmhouses, diversified farm buildings and so on, that figure skyrockets.
“There is a real and understandable sense of betrayal in our rural communities. It doesn’t matter how many times the prime minister repeats that the vast majority of farms and farmers will be unaffected - the government’s own figures show that this simply isn't the case.
“Many farmers are now beginning the process of considering how to mitigate the tax burden that will otherwise decimate the future of their and their families’ businesses and livelihoods."
Sam Dewes, private client partner at HW Fisher, said the changes will limit farmers’ ability to pass property between generations without incurring inheritance tax.
“Due to existing restrictions on APR, some farmers were also relying on BPR to supplement their APR claims. However, the changes will limit BPR in the same way,” adds Dewes.
"As with any rule change, the worst affected are those that are unable to change tack, in this case those who have kept hold of farm assets into old age in order to qualify APR, but do not have the ability to gift their assets away to the next generation in a tax efficient way.”
Dewes says 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.
He adds: "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."
