The chancellor Rachel Reeves announced in the autumn budget that the agricultural land inheritance tax exemption would end in April 2026. Landowners and farmers would be subject to a 20% tax on inheritance. This is half the levy faced by anyone else, but the relief was further extended in measures designed to protect family farms. These measures have been poorly explained by HMRC, and the confusion has been exacerbated by abysmal reporting, even by the BBC.
Relief on inherited agricultural land is set at £1mn per farmer, plus £1mn for their spouse. The farmhouse is exempt if passed on to children taking over the farm. The farmer and spouse each have their £350,000 allowance, and there is additional relief bringing the total to £3mn for a couple passing on the farm. Any tax due can be paid over 10 years, at no interest charge. This might seem generous, but the problem is far from simple to understand.
Valuing farms is complicated – here are some examples
Farmland sells for between £3,000 and £11,000 per acre for agricultural use, depending on its potential for income. Some is suitable for arable crops, some only livestock and some a mixture. The average family farm size is debated, but Defra have put this at 200 acres. So, for the highest value land, a farm of that size, at £2mn in value, would be covered by the relief for a couple. Livestock and equipment or machinery were never exempt but are within the scope of the third £1mn inheritance tax relief. So, what is the problem? Two things: land value and farm income.
James Dyson owns 36,000 acres of agricultural land, estimated to be worth in excess of £550mn. He only made £5.2mn from it last year, a small return on such a large investment. Prior to Reeves’ new tax regulations there would have been no tax to pay if he had died and passed the land on to his successors.
By investing in this way, the price of land has been driven up to the point where it is not viable to buy it on any scale for a family farming business. Some 56% of farmland bought in 2023 was sold to landowners who were not working farmers. The revenue per acre is too low to warrant the purchase, unless you are extremely wealthy and are avoiding inheritance tax.
Thresholds and agricultural property relief
Take another example. A farmer with 200 acres of medium revenue potential land valued at £2mn minus various tax exemptions (up to £1.5mn) leaves £500,000 that would be taxed at 20%. This leaves an inheritance tax of £100,000 due. Paid over 10 years, that’s £10,000 per annum at no interest. The situation will vary greatly from farm to farm, but for some, the bill may exceed profit generated by the farm after input costs are met.
Conversely, to expand on the above, a couple passing on a £2mn farm to their children would yield no inheritance tax at all, as the tax exemptions will apply to both of them. This is not rendered invalid by them passing away at different times – their heirs would still benefit from their combined £3mn exemption.
According to the Treasury:
“Reforms to agricultural property relief are expected to affect the wealthiest 500 estates each year with smaller farms not affected by the changes. So that means almost three-quarters of estates claiming agricultural property relief, including those that also claim for business property relief, would not be affected by the changes, based on the latest available data.”
If the land is hugely overvalued for the income it can generate, it can theoretically be sold off. Farming, after all, is damn hard work and long hours. But farming is also a vocation. It is in the blood and steeped in history. That may be incomprehensible to many of us, but for the farmers themselves there is an undeniable passion for the land and the life they live working it.
Heated debate, woolly issues
Following the farmers rally in Westminster on 19 November, the debate about this issue is getting more heated, if not any clearer. Many have pointed to the economic pressures that have prompted Reeves to adopt radical reforms and make a clear link to the 4% hit on GDP, £100bn a year, now estimated to result from leaving the EU. There is a popular perception that ‘most farmers voted for Brexit’. In fact, the statistics hint at around 53%. The decision to leave has meant not only a loss of subsidy and payments for land management for the environment, but huge barriers to export, particularly affecting meat and dairy producers.
Never slow to jump on a populist bandwagon, Nigel Farage turned up at the rally in London. He was met with some support from individuals, but there is little support for him in the broader farming community; little wonder after the damage Brexit has caused. Reform will be keen to exploit this issue, but aside from feigning support, their levers are limited. Farage is very pro Donald Trump, of course, but the much-touted trade deal with Trump’s USA would, as most people know, entail agreeing to chlorinated chicken and hormone-injected beef, and may lead to price competition that would cripple the UK’s farmers even more.
Farage was denied a platform at the rally, but Jeremy Clarkson, although not formally political, was leading the charge. He admitted to buying his £4.25mn farm so he could enjoy shooting, with the added bonus of gaining inheritance tax benefits. Since then, his voice on the issue has been ubiquitous in the media. Although many farmers realise that people buying agricultural land for reasons other than farming have exacerbated the problem, many still don’t.
Labour and farming
Until the budget, farmers were feeling positive about Labour. The National Farmers Union was fairly supportive of what they heard and meetings during the elections went well. Labour have promised to try to negotiate better arrangements for recognition of standards and hygiene certification. They also promised investment, but in the autumn statement it was announced that the budget would remain at £24bn for next year, doubtless attributed to the £22bn ‘black hole’ in the nation’s finances left behind by the previous Conservative government. Prime Minister Keir Starmer claimed in the Guardian that the vast majority of farmers would be unaffected by inheritance tax, but pointed out that “[w]hile in 2010, non-farmers were responsible for less than a third of farmland purchases, by last year this had risen to 56%”.
Farmers may feel aggrieved, but Reeves has had everyone in her inheritance tax sights. The threshold was due for revision in 2028 but has been frozen until 2030. Historical house price increases suggest that, by then, even a region like the East Midlands, with low average house prices, will see average houses attracting inheritance tax of over £50,000. Of course, if the economy does recover, none of this is set in stone.
Since the autumn statement, the right-wing media have been on a slur campaign against Reeves, claiming that rather than being an economist, her previous role in banking was “mundane”. Reeves, who was a joint national chess champion aged 14, got four straight As at A-level, an upper second class degree in philosophy, politics and economics at Oxford, was awarded an MSc in economics at the London School of Economics, and worked in three major banks – including the Bank of England – kept her counsel. As well she might.
More from Geoff Thompson
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