The Impact of Changes to Inheritance Tax on Farm Estates
By Arun Advani, Sebastian Gazmuri-Barker, Sanaya Mahajan, and Andy Summers
Executive Summary
Background
In the Autumn Budget 2024, the Government announced a reform to Inheritance Tax (IHT) that reduced the reliefs available for agricultural and business property (‘APR’ and ‘BPR’). From April 2026, the first £1 million of combined qualifying agricultural and business property (the ‘combined allowance’) will continue to receive 100% relief, but above this threshold, relief will be reduced to 50%.
The new combined allowance of £1 million per estate is in addition to the Nil Rate Band (NRB) and Residential Nil Rate Band (RNRB) covering up to £1 million per couple. As a result of the reform, the value of farmland and business assets exceeding these allowances will face an effective tax rate of up to 20%, whereas previously these assets had been tax-free. The tax can be paid in interest-free instalments over ten years.
The reform has proved highly controversial, especially regarding its potential impact on farmers. This report presents the first independent, evidence-based analysis of the impact of the planned reform using HMRC Inheritance Tax data. We provide a detailed impact assessment and model potential adjustments to the reform.
Definition of ‘farm estates’
Our analysis focuses on farm estates. A farm estate is not the same as a farm. It means the total wealth of an individual who died owning some farmland or other farm assets on which they claimed relief. This definition encompasses working farmers (including tenant farmers), but also investors in farmland. A farm could be split across multiple farm estates, or a farm estate could own multiple farms. All analysis is uprated to 2027 and presented as the number of estates impacted per year.
Impact of the planned reform
Our findings indicate that the planned reform would significantly reduce the concentration of relief amongst the wealthiest estates, whilst protecting family farms to a large extent. The reform is not well-targeted at reducing the use of APR and BPR for tax planning, although the Government has stated that this was not one of its objectives.
How many farm estates are impacted?
- Between 480 to 600 farm estates per year would be impacted by the reform, meaning that they would pay additional tax if there was no change in behaviour. This estimate accounts for farm estates that only claim BPR, and projected increases in the price of farmland up to 2027.
- Around 205 impacted farm estates per year (43% of all impacted farm estates) potentially comprise ‘small family farms’, as proxied by estates with a share of APR/BPR in the total estate above 60% and an estate value less than £5 million. These estates contribute 15% of additional tax from the reform.
- Almost a third (32%) of all farm estates currently benefiting from APR and/or BPR have a claim covering less than 20% of the estate, indicating that they were likely passive investors in farmland. The planned reform impacts only 15 of these estates per year (3% of all impacted farm estates), contributing 2% of additional tax.
Which farm estates are impacted?
- Over 80% of the additional tax from farm estates comes from the one third (34%) of impacted estates worth over £5 million. Estates over £10 million contribute 55% of all additional tax from farm estates. Less than 1% of additional tax comes from the one in ten (11%) impacted farm estates valued at less than £2 million.
- Around 10% of the additional tax comes from farm estates where the deceased had a total income under £25,000 per year over the five years prior to death. Almost half (47%) of additional tax would come from farm estates where the deceased had an income over £100,000, including 23% from those with incomes over £500,000.
- We divide farm estates into four ownership types: owner-farmers, tenant farmers, mixed tenure, and landowners. Owner-farmers represent 17% of all farm estates but 37% of impacted farm estates. Landowners are less likely to be impacted, representing 64% of all farm estates but 42% of impacted farm estates.
Would farms need to be sold to pay the tax?
- Almost half (49%) of all impacted farm estates would see a tax increase of less than 5 percentage points (pp). Amongst farm estates worth less than £2.5 million, only 15 estates per year would face an increase larger than 5pp. All of the 25 farm estates per year facing an increase larger than 15pp are valued at over £7.5 million.
- 86% of impacted farm estates could pay their entire IHT bill out of non-farm assets, leaving around 70 farm estates per year that could not. Of these, around 40 farm estates per year would face a residual bill greater than 20% of the farm’s income (after tax and depreciation), if paid in ten-year annual instalments.
Alternatives and adjustments
Farm industry bodies have proposed several alternatives to the planned reform. The most prominent is ‘clawback’, whereby farmland and other business assets would continue to qualify for 100% relief but only if retained by the heirs for at least seven years after death. We conclude that clawback would not meet the Government’s stated objective of reducing the concentration of relief and is unlikely to raise as much revenue as the planned reform. It would also not be feasible to deliver by April 2026 due to the major changes in legislative infrastructure and administrative systems required. Instead, we explore the following options:
Minimum share rule
A minimum share rule would remove relief from estates for which farm and business assets are a relatively minor share, reducing the use of these assets as a tax shelter. Restricting relief to estates whose APR/BPR claim covers at least 60% of the total estate could fund an increase in the combined allowance for 100% relief to £5 million per estate, whilst still raising at least as much revenue as planned reform overall. This adjustment would better target estates using APR and BPR for tax planning, whilst extending protection for family farms and other businesses. However, in isolation, it would slightly increase the concentration of relief compared with the planned reform. Moreover, whilst potentially deliverable by April 2026, implementation on this timescale would likely require some design compromises.
Upper limit on relief
An upper limit on relief would be the most direct means to reduce the concentration of relief, which was one of the Government’s stated aims of the reform. If relief was restricted to the first £10 million of claim, with no additional relief above this limit, this could fund an increase in the combined allowance for 100% relief to £2 million per estate. The effect would be to extend protection for family farms and other small businesses, at the expense of larger landowners and businesses. This adjustment would be straightforward to deliver by April 2026, if the Government wished. However, if the response by the wealthiest estates was substantially larger than our central estimate, then it may only be possible to increase the combined allowance to £1.5 million, whilst still raising as much revenue as the planned reform.
Transferrable allowance
Under the planned reform, the Government has said that the combined allowance will not be transferrable between couples, meaning that any unused allowance on the first death cannot be carried over to the surviving spouse. We suggest that the allowance should be made transferrable, as is already the case for the NRB and RNRB. In the long run, the revenue cost would be small and would save couples from having to engage in tax planning to fully utilise their allowances. But in the short run, if transferability was ‘backdated’ for individuals whose spouse had already died, it must be acknowledged that the revenue cost would be larger.
Conclusion
If the UK is to have an Inheritance Tax at all, it should apply as equally as possible to all types of wealth. The only economic justification for deviating from this principle is where credit constraints could make it difficult for otherwise profitable farms and small businesses to pay the tax. On this basis, the planned reform is better targeted than the status quo, but it could be better targeted still. Whilst there are no silver bullets, we have sought to explore options that could extend protection for farms and other small businesses whilst further reducing the use of agricultural and business property as a tax shelter. We think these options merit serious consideration.
