What are the inheritance tax changes for farmers and why are they angry about it?

Labour’s plan ensures an inheritance tax of 20 per cent is imposed on farmers’ agricultural assets worth more than £1 million

British farmers are “bewildered and frightened” for the future of their industry, a government-commissioned report has warned ministers, as many cite fears over changes to inheritance tax as a key concern.

Industry leaders continue to protest the so-called ‘tractor tax’, which was first announced over a year ago, and saw key changes to how agricultural and business property can be passed on.

Thousands of farmers have participated in a series of protests in the central London, several of which saw tractors driven to Parliament – often against the guidance of local police.

Farmers and their tractors protest in Whitehall, London, in February (PA Wire)

The farm profitability report by by former National Farmers' Union (NFU) president Baroness Minette Batters has called for a “new deal for profitable farming” which “recognises the true cost of producing food and delivering for the environment”.

While the changes to inheritance tax were not in the scope of Baroness Batters’ review, she said it was raised by almost all respondents and has created “significant ongoing concern” for some farmers over the viability of their businesses.

Here’s everything you need to know about the issue:

What are the changes to farm tax?

Previously, farming businesses qualified for 100 per cent relief on inheritance tax on agricultural property and business property.

But now the tax is being imposed on farms worth more than £1 million, with an effective tax rate of 20 per cent on assets above the threshold, rather than the normal 40 per cent rate for inheritance tax.

The Government says that the actual threshold before paying inheritance tax could be as much as £3 million, once exemptions for each partner in a couple and for the farm property are taken into account.

Why have the changes been brought in?

The government has said “difficult decisions” had to be made to fill a £22 billion fiscal hole it inherited from the Conservatives, and it is targeting the agricultural inheritance tax relief to make it fairer.

It said figures showed that 7 per cent of the wealthiest estates account for 40 per cent of the total value of agricultural property relief, costing the Treasury £219 million.

How many farmers will be affected by the changes?

According to the Treasury, some 27 per cent of estates claiming agricultural property relief (APR) were above the £1 million threshold in 2021/2022, suggesting that nearly three-quarters of farms would not fall within the scope of the charges.

The Treasury says around 500 estates a year are expected to pay inheritance tax under the changes.

Jeremy Clarkson attends a farmer rally, November 2024 (Aaron Chown/PA Wire)

However, the NFU says farm businesses have also qualified separately for business property relief, which can cover things such as harvested grain and livestock, machinery and diversified businesses such as camping on a farmer’s field.

Now the two are combined, with a single £1 million allowance before inheritance tax is levied, which could mean more farms are in scope.

The NFU points to figures from the Environment Department (Defra) showing that 66 per cent of farm businesses in England have a net value of more than £1 million.

But the government has countered that analysis, saying that looking at asset value alone does not necessarily mean the farm will be affected, as it depends on individual circumstances.

Why do farmers say the changes are a problem?

According to the NFU, while farms may have a high nominal asset value – the value of their land and business assets – the returns from farming are often very low, so farming families may not have the reserves to pay for inheritance tax liabilities without selling off assets.

The NFU’s president Tom Bradshaw said the change had left elderly farmers in the “cruellest predicament”, as they may not live for another seven years to take advantage of exemptions for gifting assets, or to hand over assets in a way that qualifies for the gifting exemption.

He has also warned the changes could undermine investment as farmers will be wary of increasing the balance sheet as they will be liable to pay inheritance tax on it.

There are also concerns that it could affect tenant farmers if landowners no longer benefit from having a tax exemption for farmed land.

Mr Bradshaw said there was a feeling among farmers that the government did not understand food production.