The government has announced a climbdown on controversial plans to reduce inheritance tax relief on farms and businesses, raising the threshold at which businesses will be taxable from £1 million to £2.5 million.
In the 2024 Autumn Budget, the government announced plans to reduce inheritance tax relief on agricultural properties and businesses worth over £1 million to 50%. The change was due to take effect from April 2026.
Inheritance tax is charged at 40%, so the change would effectively introduce a 20% tax rate on the value of inherited farms or businesses over £1 million.
The government has today partially rowed back on its proposals, announcing it will raise the threshold to £2.5 million.
That will allow spouses or civil partners to pass on up to £5 million in qualifying agricultural or business assets between them before paying inheritance tax, on top of existing allowances, according to the government.
Married couples and civil partners can pass on a farm worth up to £5.65 million without paying inheritance tax, by combining two £2.5 million agricultural/business property allowances and two £325,000 nil‑rate bands that can be transferred between them on death.
“We have listened closely to farmers across the country and we are making changes today to protect more ordinary family farms,” said environment secretary Emma Reynolds. “We are increasing the individual threshold from £1 million to £2.5 million which means couples with estates of up to £5 million will now pay no inheritance tax on their estates.”
What is agricultural property relief?
Agricultural property relief (APR) is a type of inheritance tax relief. It reduces the amount of tax that farmers and landowners must pay when farmland is passed to the next generation.
Business property relief is similar, but for business assets that are part of the estate. The threshold increase will also apply to business property relief, which will be a cause for celebration for family business owners.
Critics arguing against the reforms to APR have pointed out farms tend to have a lot of expensive assets that can’t be easily divided up and sold to foot an inheritance tax bill, such as land or machinery.
“Although farm asset values can be high, the returns are often low,” said Sean McCann, chartered financial planner at financial advisory firm NFU Mutual. “In many cases we could still see land and buildings having to be sold on the farmer’s death to pay the tax bill, with the next generation inheriting smaller less efficient farms as a result.”
That would be particularly acute for the owners of relatively small family-owned farms that wished to pass ownership on to their children.
The government estimates that the new threshold of £2.5 million will reduce the number of estates that are subject to inheritance tax on their farms or businesses by half, from 375 to 185, in the 2026-27 tax year.
“While this is a significant improvement on the previous proposals and will take many smaller farms and businesses out of the inheritance tax net, it will still leave many farming and business owning families facing a large inheritance tax bill,” said McCann.
