Two truths which are universally acknowledged are that if you introduce a tax exemption, people will use it; and if you abolish it, people will complain. The Budget changes to IHT on farms illustrate this very clearly.
Prior to the Autumn Budget 2024, qualifying agricultural or business assets received 100% relief from IHT, without limitation. The government has now announced that, from April 2026, the first £1m of qualifying agricultural or business property will be exempt, with the balance charged at 50% of the normal rate. The Treasury’s summary of the reforms points out that only about 500 estates per year claiming agricultural property relief (APR) will be affected, and says that the reforms will ‘better target’ the reliefs, as currently a small number of large estates claim a significant amount of relief.
Tax experts, including Dan Neidle and Giles Mooney, were quick to point out that a typical family farm can still benefit from up to £3m of relief, assuming that some basic planning is done. If a farm is owned jointly by husband and wife, then each can leave £1m to children, claiming APR, and the remaining £1m can be covered by the nil rate band. (Note, however, that the APR relief is not transferable between spouses so it will be important to use it on the first and second deaths separately.) For those with farms above the limit, the 20% tax can be paid by instalments, over a 10 year period.
Inevitably, some people, including some family farms, will still have some tax to pay. Some of those commenting have pointed out that the returns from farming can be as little as 1% of the market value of the assets, and so the inheritance tax bill could mean that some or all of the farm has to be sold. But this seems to point to a market failure – if a farmer could make (say) 4% by selling the farm and investing the proceeds, why are they continuing to farm and making only 1%? Of course, it is not as simple as that, but it does highlight that farm incomes are too low (we should all be willing to pay more for our food, perhaps) and land values are too high.
The loudest critics of the policy, however, have been well-known owners of farmland such as Jeremy Clarkson and James Dyson. Guy Shrubsole, an environmental campaigner and author, has commented on X (formerly Twitter) and has pointed out that, in 2010, Clarkson said that he had bought a farm, and that ‘Land is a better investment than any bank can offer. The government doesn’t get any of my money when I die’. And James Dyson owns a total of 33,000 acres of farmland – hardly a small family farm. I am not sure that these vocal, and wealthy, critics are helping the debate to move forward.
There is real concern more widely among the farming community, as reported by the BBC. James Rebanks (who is definitely a genuine working farmer) fears that ‘Labour’s budget will destroy rural life’, but makes two key additional points. The first is that, in addition to IHT changes, the government has reduced the amount payable under schemes designed to replace the Common Agricultural Policy. His second point is that ‘Taxation should distinguish between working farmers and tax-dodging chancers.’ I have some sympathy with his second point, and wonder whether the changes could have been better-designed, to give more relief to those who earn their living primarily through farming (with conditions perhaps similar to those for Business Asset Disposal Relief) and less to those who merely hold agricultural land as a tax-efficient investment. But then, that would have made the changes more complex, and perhaps the £1m limit was deliberately chosen as an amount which mirrors that for CGT on business assets. Rupert Harrison, former Chair of the UK Council of Economic Advisers, has suggested that a simpler way to fix the ‘family farm tax problem’ would be to give £5m of relief, but tax any excess at a rate of, say, 30% rather than 20%.
Another factor may be that many of those who are worried about the IHT impact will not actually suffer a cost. Many people are surprised to learn that IHT only affects about 7% of estates, and the Treasury are standing firm in their estimate that only a relatively small proportion of farms will be affected, although their estimate is that the changes will affect around 28% of farming estates.
Writing in The Observer (17 October), Will Hutton is more positive about the changes, and thinks that they will bring ‘new life’ to rural Britain. However, this is a strongly-worded opinion piece (with reference to ‘the cultural trappings of feudalism’ and the ‘baronial carve-up of England after the Norman conquest’) with no technical or economic detail to support its arguments.
The IFS, by contrast, has discussed the proposals in detail, and in somewhat calmer terms, on a podcast. It points out that agricultural land is still treated preferentially compared to other assets, and while it is natural that individuals may be upset at the prospect of having to sell all or part of the family farm, those who inherit a family home may face similar emotionally difficult decisions. The IFS also addresses the argument that if all or part of the farm has to be sold to settle the IHT bill, this could threaten food security: it makes the good point that if farming is not economically viable, but for good public policy reasons we want the land to be used for food production, then the answer is to provide direct subsidies rather than addressing this through the blunt tool of the IHT system.
Overall, this is a relatively modest change to the tax system, expected to raise some £500m per annum in respect of both APR and BPR. The strength of feeling it has generated shows just how hard it will be for the government to implement any more radical reforms to the tax system in the future.
Two truths which are universally acknowledged are that if you introduce a tax exemption, people will use it; and if you abolish it, people will complain. The Budget changes to IHT on farms illustrate this very clearly.
Prior to the Autumn Budget 2024, qualifying agricultural or business assets received 100% relief from IHT, without limitation. The government has now announced that, from April 2026, the first £1m of qualifying agricultural or business property will be exempt, with the balance charged at 50% of the normal rate. The Treasury’s summary of the reforms points out that only about 500 estates per year claiming agricultural property relief (APR) will be affected, and says that the reforms will ‘better target’ the reliefs, as currently a small number of large estates claim a significant amount of relief.
Tax experts, including Dan Neidle and Giles Mooney, were quick to point out that a typical family farm can still benefit from up to £3m of relief, assuming that some basic planning is done. If a farm is owned jointly by husband and wife, then each can leave £1m to children, claiming APR, and the remaining £1m can be covered by the nil rate band. (Note, however, that the APR relief is not transferable between spouses so it will be important to use it on the first and second deaths separately.) For those with farms above the limit, the 20% tax can be paid by instalments, over a 10 year period.
Inevitably, some people, including some family farms, will still have some tax to pay. Some of those commenting have pointed out that the returns from farming can be as little as 1% of the market value of the assets, and so the inheritance tax bill could mean that some or all of the farm has to be sold. But this seems to point to a market failure – if a farmer could make (say) 4% by selling the farm and investing the proceeds, why are they continuing to farm and making only 1%? Of course, it is not as simple as that, but it does highlight that farm incomes are too low (we should all be willing to pay more for our food, perhaps) and land values are too high.
The loudest critics of the policy, however, have been well-known owners of farmland such as Jeremy Clarkson and James Dyson. Guy Shrubsole, an environmental campaigner and author, has commented on X (formerly Twitter) and has pointed out that, in 2010, Clarkson said that he had bought a farm, and that ‘Land is a better investment than any bank can offer. The government doesn’t get any of my money when I die’. And James Dyson owns a total of 33,000 acres of farmland – hardly a small family farm. I am not sure that these vocal, and wealthy, critics are helping the debate to move forward.
There is real concern more widely among the farming community, as reported by the BBC. James Rebanks (who is definitely a genuine working farmer) fears that ‘Labour’s budget will destroy rural life’, but makes two key additional points. The first is that, in addition to IHT changes, the government has reduced the amount payable under schemes designed to replace the Common Agricultural Policy. His second point is that ‘Taxation should distinguish between working farmers and tax-dodging chancers.’ I have some sympathy with his second point, and wonder whether the changes could have been better-designed, to give more relief to those who earn their living primarily through farming (with conditions perhaps similar to those for Business Asset Disposal Relief) and less to those who merely hold agricultural land as a tax-efficient investment. But then, that would have made the changes more complex, and perhaps the £1m limit was deliberately chosen as an amount which mirrors that for CGT on business assets. Rupert Harrison, former Chair of the UK Council of Economic Advisers, has suggested that a simpler way to fix the ‘family farm tax problem’ would be to give £5m of relief, but tax any excess at a rate of, say, 30% rather than 20%.
Another factor may be that many of those who are worried about the IHT impact will not actually suffer a cost. Many people are surprised to learn that IHT only affects about 7% of estates, and the Treasury are standing firm in their estimate that only a relatively small proportion of farms will be affected, although their estimate is that the changes will affect around 28% of farming estates.
Writing in The Observer (17 October), Will Hutton is more positive about the changes, and thinks that they will bring ‘new life’ to rural Britain. However, this is a strongly-worded opinion piece (with reference to ‘the cultural trappings of feudalism’ and the ‘baronial carve-up of England after the Norman conquest’) with no technical or economic detail to support its arguments.
The IFS, by contrast, has discussed the proposals in detail, and in somewhat calmer terms, on a podcast. It points out that agricultural land is still treated preferentially compared to other assets, and while it is natural that individuals may be upset at the prospect of having to sell all or part of the family farm, those who inherit a family home may face similar emotionally difficult decisions. The IFS also addresses the argument that if all or part of the farm has to be sold to settle the IHT bill, this could threaten food security: it makes the good point that if farming is not economically viable, but for good public policy reasons we want the land to be used for food production, then the answer is to provide direct subsidies rather than addressing this through the blunt tool of the IHT system.
Overall, this is a relatively modest change to the tax system, expected to raise some £500m per annum in respect of both APR and BPR. The strength of feeling it has generated shows just how hard it will be for the government to implement any more radical reforms to the tax system in the future.
