Assessing the Impact of Budget Tax Adjustments on Farms

Significant opposition has emerged from numerous farmers in response to the inheritance tax adjustments for agricultural properties, as unveiled in the Budget. Farmers journeyed to London to participate in a demonstration close to Parliament, aiming to draw attention to their worries. Commencing April 2026, agricultural assets inherited with a value exceeding £1m, previously exempt, will become subject to inheritance tax at a rate of 20% – which is half the standard rate. Conflicting figures have been presented regarding the number of farms that will be impacted. These estimates range from a total of 70,000 to as few as 500 annually. The Country Land and Business Association (CLA) provided the higher estimate, with its president, Victoria Vyvyan, stating: “We estimate that capping agricultural property relief at £1m could harm 70,000 UK farms, damaging family businesses and destabilising food security.” Liberal Democrat leader Sir Ed Davey also referenced this figure, asserting that the government must “listen to rural communities” and revoke the policy change. This figure does not represent the yearly count of estates subject to inheritance tax, but rather an approximation of the total number of farms with sufficient value to incur the tax. The CLA’s calculation was predicated on an average land price of £8000 per acre, indicating that 125 acres (51 hectares) of land would be required to meet the £1m tax-exempt threshold. The association referenced Defra figures for 2023 (table 2_3a), which indicated 30,000 UK farms ranging from 50 to 99 hectares and an additional 40,000 farms exceeding 100 hectares, collectively amounting to 70,000 farms. Naturally, a farm’s tax liability arises only upon inheritance, suggesting that 70,000 may not be the precise figure to consider. However, the CLA justified employing this number by arguing that since death is unforeseeable, all such farms would need to factor in the potential for an inheritance tax obligation during their planning. Conversely, the Treasury anticipates that 500 estates will be impacted by these modifications annually. According to HM Revenue and Customs (HMRC), 462 inherited estates possessed assets eligible for Agricultural Property Relief exceeding £1m in 2021-22. Under the revised regulations, these 462 estates would be subject to a 20% inheritance tax on any value surpassing £1m, rather than on the entire asset value. The standard inheritance tax rate is 40%. Furthermore, estates holding agricultural assets are eligible to claim Business Property Relief (BPR), which is likewise subject to new caps as part of the Budget’s inheritance tax reforms. Nevertheless, HMRC data published by the government indicates that considering BPR does not substantially alter the aggregate figures. Nonetheless, Dan Neidle, who founded the independent Tax Policy Associates, highlights that, consistent with the general populace, no inheritance tax is levied on property values up to £325,000, which increases the untaxed aggregate to £1.325m. For married farmers, their spouse could transfer an additional £1.325m without tax, elevating the total untaxed sum to £2.65m. HMRC figures for 2021-22 show that 117 estates had APR assets valued over £2.5m under Agricultural Property Relief. Furthermore, a £175,000 tax-exempt allowance applies to a primary residence when bequeathed to children or grandchildren. This raises the total untaxed amount for a farming couple to as much as £3m. Paul Johnson, director of the Institute for Fiscal Studies (IFS), an independent economy think-tank, informed Sky News that “The changes will affect a remarkably small number of some of the most valuable farms.” He further commented that “[Farms are] still more generously treated, actually, than farms used to be in decades past.” Steve Reed, the secretary of state for the environment, food and rural affairs, affirmed that the “vast majority” of farmers would remain unaffected by the alterations. In an article for the Telegraph, he stated that “only the richest estates will be asked to pay.” He also penned: “It’s become the most effective way for the super-rich to avoid paying their inheritance tax.” Research conducted by property consultants Strutt & Parker revealed that nearly 40% of farms sold in England last year were acquired by investors, whereas 47% were purchased by active farmers. Darren Jones, the chief secretary to the Treasury, has indicated that the existing inheritance tax exemptions incur a cost of “about £1bn a year for taxpayers.” The Treasury projects that the modifications to inheritance tax, alongside adjustments to Business Tax Relief, will generate £230m in 2026-27, marking their initial year of implementation. This revenue is anticipated to increase to £520m by the conclusion of the forecast period in 2029-30. However, the independent Office for Budget Responsibility (OBR) cautions that these figures are subject to considerable uncertainty. Sam Kirkham, an agriculture specialist at Albert Goodman accountants, observes that “people look at the value of farms and think the farmers must be wealthy.” Yet, she contends that if a farm is inherited by the next generation to maintain food production, they do not have the opportunity to realize that capital. She further notes that farm profits are insufficient to cover the extra burden of inheritance tax. Government studies indicate that the average farm generated a profit of approximately £45,300 last year, though this figure might be inflated due to its reliance on a survey that omitted farms with the lowest incomes. Additional government data suggests that the average return on capital for farms – representing the value farmers can derive from assets such as farmland and machinery through activities like crop cultivation – stands at merely 0.5%, a rate considered low when contrasted with other enterprises. The government highlights that individuals inheriting agricultural land will be granted 10 years to settle their inheritance tax obligation without interest, a departure from other inheritance tax payments that typically require immediate settlement.