Changes to farming inheritance tax – what are the details?

Last month’s Budget included reforms to agricultural property relief (APR) to inheritance tax, which applies when farmers and landowners pass farmland to the next generation, and business property relief (BPR), which relates to business assets that are part of the estate.

Under the changes, the full 100% relief from inheritance tax will be restricted to the first £1 million of combined agricultural and business property relief, above which landowners will pay inheritance tax at 20%, compared with 40% on other estates.

The new tax, which come in from April 2026, can be paid in instalments over 10 years interest free, rather than immediately, the Government said.

It comes on top of other exemptions for inheritance tax, so that two people with farmland could pass on up to £3 million without anything being paid, depending on their circumstances.

The Government gives an example of a couple who jointly own a farm who will be able to pass on land and property valued up to £3 million to a child or grandchild tax free.

That is based on £1 million from their combined £500,000 tax free allowances, including £325,000 each for the “nil-rate band” or personal allowance and £175,000 allowance for their residence if passing on to a direct descendent.

On top of that there is £1 million each for agricultural property and business property relief.

In the case of an individual who owns a farm, they will be able to pass on land and property valued up to £1.5 million tax free to a child or grandchild.

And farms passed on seven years before death will continue to be exempt, as gifts.

In a letter to the Parliamentary Treasury Committee, Chancellor Rachel Reeves said up to around 520 estates a year who claim APR, including those which also claim BPR would be impacted to some extent by the changes.

A quarter of those claims included a claim for unlisted shares, suggesting they were, at least in part, investment portfolios set up to minimise inheritance tax liabilities, and when those were excluded it left 430 estates, the letter said.

Data shows that in 2021-22, 84% of claims just for agricultural property relief were made by estates less than £1.5 million, and where an estate was claiming both agricultural and business property relief, 78% of claims were worth less than £1.5 million, the letter said.

On average between 2018 and 2022, nearly half (47%) the benefit of the reliefs went to the top 7% of estates making claims, it said.

For inheritance tax, agricultural land is valued as if it can only ever be used for farming, which may lead to lower values than its market value.

But Nick von Westenholz, director of strategy at the National Farmers’ Union, said the £1.5 million allowance, or £3 million for a couple, was a “best case scenario” and most people would be able to claim less than that.

He also said the Treasury figures in the letter suggest that around 37% of estates would be above the £1 million threshold for claiming both agricultural and business property relief, rather than 27% which the Government had previously said – and which was based on APR alone.

The NFU has said that Treasury estimates contrast with Environment Department (Defra) figures, which show that 66% of farm businesses have a value of more than £1 million.

And the latest estimates from the NFU suggest that 75% of commercial farm businesses, over 50 acres, could be affected.

But a Government spokesperson said: “Looking at asset value alone does not necessarily mean that the farm will be affected, as it depends on individual circumstances.”

While the Treasury estimates the changes could pull in around £520 million a year by 2028, it is expected farm businesses will respond by changing ownership structures, and that land prices will become more affordable for farmers as fewer investors buy land for tax purposes.