Inheritance Tax: What the new rules mean for farmers

“Nothing is certain in life except death and taxes,” the saying goes. Yet, until now, the latter hasn’t applied as strongly to many landowners. In the Autumn Budget, the Chancellor introduced major changes to the tax landscape that will reshape how agricultural land and businesses are passed down through generations. 

These changes have sparked considerable anger within the farming community, quickly turning the issue into a political flashpoint. While some are opportunistically using farmers’ frustrations to score political points, not always based on facts, this heightened focus on farming is also shining a light on the deeper-rooted issues within a much-beleaguered sector. 

What are the tax-rules?  

On 30 October, the Chancellor announced a cap on Agricultural Property Relief (APR) and Business Property Relief (BPR), which provide inheritance tax exemptions for business and agricultural property assets. 

Previously, these reliefs allowed 100% inheritance tax relief on agricultural property and qualifying business assets, with no cap. The new rules introduce a threshold: combined agricultural and business property assets up to £1 million will still receive 100% relief, but anything above that will be taxed at an effective rate of 20%, payable over ten years interest-free. 

However, there are notable caveats: farmers may avoid the tax by transferring property at least seven years before death. Many will also be able to take advantage standard household tax allowances if the farm is owned by a couple, potentially pushing up amount they can pass on tax free to £3 million. 

The tax-free allowances will vary depending across farms, and given the historically high value of agricultural land, machinery, and buildings, many farm businesses will now need to prepare for inheritance tax in ways that were previously unnecessary. 

Why is this tax being introduced? 

The rationale behind the changes is clear: for decades, farmland has served as a tax shelter for the wealthy. Introduced in 1992, the inheritance tax exemption for farmland allowed multi-millionaires, and in some cases billionaires, to avoid significant tax liabilities. Economist Tim Leunig pointed out that farmland became "the best way to leave £100 million to your kids," exacerbating wealth inequality and inflating land prices in the process. 

These inflated prices have made it difficult for new farmers to enter the industry, for tenant farmers to purchase the land they work, and for communities to buy land when it comes up for sale. In this sense, the uncapped relief has been detrimental to farming. Labour’s introduction of a cap aims to close this loophole and prevent land from being a convenient tax dodge for the ultra-rich. 

Who will be affected? 

DEFRA secretary Steve Reed has said “Only the richest estates will be asked to pay – not small, family farms”. According to the Chancellor, 72% of farms won’t be affected, with the treasury estimating that just 500 farms per year expected to pay more tax. This is a figure based on the previous annual number of claimants of APR. 

However, organisations like the National Farmers’ Union (NFU) and Country Land and Business Association (CLA) argue that many more farms could be hit. This is because the new threshold includes both APR and BPR, combining the value of land, machinery, buildings, and other assets. In many cases, family farms with even modest operations could find their assets exceeding £1 million. The NFU has pointed to some of DEFRA’s own figures, which suggest that 66% of farms could face higher tax bills when taking into account APR and BPR. 

What does this mean for farming? 

The government’s intention is to target wealthy landowners who use the system to avoid tax. But the policy is arguably too crude and risks ensnaring many family farms—the very farms politicians claim to support. A calm assessment is needed around where real unfairness is being introduced and technical fixes are needed.   

The reform of APR was necessary, but the solution proposed may prove overly simplistic in some ways. Land is worth a lot because of wealthy individuals gaming the system, but it shouldn’t be farmers—particularly those committed to nature friendly farming—who end up paying the price for this. The change may feel like a tough pill to swallow when farming has been under so many pressures in recent years. 

In many cases, farms are asset-rich but cash-poor. Farmers struggle to make a decent income due to unfair supply chains, and many have seen their profits dwindle as monopolistic suppliers and retailers extract value from the food system. Supermarkets have posted massive profits year after year, while Sustain’s research shows that farmers receive less than 1% of the total profits for the food they produce. 

The decline in full-time agricultural workers is stark, with a 4.6% decrease in 2023 alone. The financial, physical, and mental toll of farming is driving people out of the profession and discouraging new entrants from taking it up.  

Supermarkets and large agribusinesses are squeezing every last drop out of the food supply chain, leaving minuscule margins for farmers. This is a deeply unfair and extractive system. A fairer and more effective approach would be to start by taxing and regulating the bigger players in the supply chain, where the real profits are made. 

What needs to change? 

The intention behind capping APR and BPR is sound—land should not be a tax haven for the wealthy. But this policy needs to find a way to distinguish between farmers working to provide public goods and nutritious food, and wealthy individuals seeking a tax break. Tax relief could be reserved for those who provide the best environmental stewardship and other public goods. Exemptions should arguably be targeted at those enrolled in government environmental schemes, who are farming the land to produce nutritious food while providing public goods such as habitat creation and flood protection.

The government must recognise the vital role agriculture plays in a food-secure, ecologically restorative future. Allocating an additional £700 million to England’s nature-friendly farming budget is not only necessary for the UK to meet its environmental targets but also to support farmers’ livelihoods—a modest investment compared to the £22 billion recently pledged for carbon capture. 

The current extractive food supply chain harms farmers’ financial stability and stifles investment in sustainable practices. Stronger regulations across the supply chain would enhance government credibility among farmers and help eliminate barriers to ecological recovery. 

As farmers’ frustration mounts over the new inheritance tax rules, it's crucial for the government to consider the deeper reasons fuelling this response from a sector that has endured years of what has amounted to managed decline. With farming in the political spotlight, there’s a window of opportunity to rethink a range of policies. Well-crafted policies and tax reforms could shift burdens and barriers to be catalysts for a food system that genuinely values farmers and drives sustainable farming into the future.