In her budget, Rachel Reeves announced that, from 2026, inheritance tax (IHT) will be charged on larger farms. While it used to be possible when a farm owner died for it to pass to his or her heir/s completely free of tax, in future IHT will be payable at 20% on any value over £1m. This was a shock to some, but not entirely new. Inheritance tax used to apply for farms until it was abolished by Norman Lamont just before the 1992 election.
The change has provoked outrage among some farming lobbies. Victoria Vyvyan, President of the Country Land and Business Association said:
Labour has made repeated assurances over the last 12 months that it would not tamper with inheritance tax reliefs, and its decision now to rip the rug from under farmers is nothing short of a betrayal…. We estimate that capping agricultural property relief at £1m could damage 70,000 UK farms, damaging family businesses and destabilising food security.
So is she right?
Who owns farms?
Farms are broadly of two kinds. A little over half are owned by the farmer themselves. The rest are rented from a landowner, who does not farm.
Historically, tenant farmers have leased their farms from big landowners, and those tenancies have often been very long term, sometimes held for several generations of the same family. However, in recent years tenancies have been getting shorter.
This partly reflects who owns the land. Traditionally, large estates have been in the hands of the same family or institution (like the royal family and Oxbridge Colleges, who are significant landowners in East Anglia) for very long periods, sometimes centuries. The landowners had no interest in selling the land and were more likely to be interested in retaining its value through good farming practices.
Speculating in farmland
But in recent years, we have seen a growing number of large estates being bought by private investors, like James Dyson and Jeremy Clarkson, attracted by the fact that land values are a secure asset, whose value increases over time. In the last ten years, the value of farmland has increased by 24%. As estate agents, Knight Frank, commented in January 2024:
On an annual basis average farmland values increased by 7%, a performance that only gold could draw level with. The FTSE 100 equities index could only muster growth of 4%, while most house price indices fell into negative territory during the year.
But an additional benefit has been that farms can be passed on free of IHT. Such owners may have little interest in farming and less commitment to the long-term future of the land. They may prefer short-term tenants who can generate quick profits. The average new tenancy is now just over three years (shorter than many crop rotation cycles).
This may not be good for the long-term health of the land, and just as significantly, speculative purchases have been driving up land values. This makes it more difficult for new people to enter farming, especially since local authorities have been selling off their farms, which used to be a way in to farming for young farmers starting out.
Family farms
Protests about the tax change have focused on family-owned farms. The Country Land and Business Association says that in England there are 70,000 farms larger than 80 hectares, all of which will be theoretically affected by the tax change. However, most will be too small to pay any tax, and for the rest this is a problem only on paper until the moment that the farm changes hands, by sale, gift or inheritance.
In any given year, very few farms are inherited by people who wish to continue the business. Firstly, only a small proportion of farmers die in any year. Secondly, given that the average age of a farmer is close to 60, most of their children are already in middle age and established in some other career. Many will prefer to sell the farm, rather than abandon that.
Although there has been no IHT on farm inheritance, we do know how many farms could be affected, because when anyone dies owning significant property, the value of the estate must be registered for probate with HMRC. From those records we know that, in England in 2021-2, of the 70,000 farms, only 462 farms valued at more than £1m were inherited (0.6% of the total). And three quarters of these were valued at less than £2.5m.
Keeping it in the family
For those who wish to keep the farm in the family (and when the next generation want to do this) there is an alternative strategy. That is to hand it over sooner. That could be good for productivity. As one commentator observed to a researcher on the ageing workforce:
One of the constraints on agricultural productivity is old blokes who won’t get off the tractor, as their children approach retirement age.
Injecting new blood and new ideas by handing over sooner to the next generation could be good for the farm.
Handing over sooner works, because gifts above a certain size are subject to IHT if they are made within seven years of death. The average family farmer being around 60, they probably have another 20 years to live. So, if he or she gifts the farm to the next generation within the next few years, in most cases there will be no tax liability.
Tax lawyer Dan Neidle has suggested another strategy: to take out a life insurance policy to cover the likely inheritance tax. No doubt tax planners and insurers will already be working on such schemes, though this will probably need long term planning , and may only apply to younger farmers.
Who loses?
The people who lose most from this tax change are the heirs of the owners of very large land holdings. Those owners have seen the value of their asset rise steeply in recent years, and until now they could pass it on free of tax. Now those heirs will face a tax liability, and since inheritance is one of the main drivers of wealth inequality, we should probably welcome this.
In 2021–2 (the most recent year for which figures are published) only 37 farms valued at over £5m were inherited. For them the average tax liability under the new scheme (which only takes effect in 2026) might now be around £1m. This may be a small dent in the government’s financial problems. But it is arguably a policy which discourages the speculation which has been driving up land values, blocking new entrants to farming, and undermining good farming practices.
We should be cautious about the cries of alarm.
