Unpicking Starmer’s farmer’s Tax

Robbie Jones

The protests in London and Llandudno earlier this week have demonstrated the strength of feeling amongst farmers about the UK Government’s proposed changes to Inheritance Tax.

A lot of figures are being thrown around, particularly around the value of allowances and the likely number of farms that will be caught by the changes.

Inheritance Tax (or IHT) is a complicated business and is probably one of the most hated but least understood taxes in the UK. According to official statistics in 2021-22, only 4.39% of UK deaths resulted in an IHT charge.

Facts are important, and understanding the current rules and the proposed changes will help ensure there is a rational debate. The purpose of this article is not to argue for or against the UK Government’s proposed changes, it is simply to set out the facts.

IHT – the Basics

Firstly – some basics on IHT. This is going to get technical, but I will do my best to keep it as succinct as possible.

If you pass on your estate (your property, possessions and money) to anyone other than a spouse, there is a potential IHT charge. That’s because the transfer of assets between spouses are exempt from IHT.

For non-spousal transfers, every UK resident is entitled to a Nil Rate Band. That means the first £325,000 of their estate is exempt from IHT. Spouses can pass on any unused Nil Rate Band to the survivor – that is, if a husband dies, the wife can inherit his Nil Rate Band, giving her a combined £650,000.

A second allowance is available which is known as the Residential Nil Rate Band. That is worth up to £175,000 per UK resident. It can only be claimed if your home is passed on to a direct lineal descendant – children, grandchildren etc. and their spouses. It can only be used against a single property – so if your home is worth £150,000, you can only claim £150,000 Residential Nil Rate Band.

As with the Nil Rate Band, spouses can pass it on, so in the same scenario as above the wife could inherit her husband’s Residential Nil Rate Band. Combined with her own, that would give additional allowance of up to £350,000 (subject to the value of the home).

All-in-all, spouses could be entitled to up to £1million of allowances against their estate, while an individual could be entitled to up to £500,000 of allowances.

But – there’s always a but – if your estate is worth more than £2million, you will start losing the Residential Nil Rate Band at a rate of £1 for every £2 over. So, if your estate is worth £2.1million, you would be entitled to a maximum of £300,000 Residential Nil Rate Band (i.e. you lose £50,000 of it).

It is important to set this out because this applies to farmers just as much as it does to any other person in the UK.

Agricultural Property Relief

Under current rules, some agricultural property qualifies for Agricultural Property Relief at 100%. It doesn’t exempt every part of a farm from IHT, but it does cover most land and agricultural buildings. Those bits not covered, such as machinery, derelict buildings or livestock often qualify for Business Property Relief, also at 100%. All-in-all, these exemptions meant that most farms in the UK could be inherited with little or no IHT charge.

From April 2026, the government has proposed capping Agricultural Property Relief and Business Property Relief at a combined £1million (not each).

Going back to our husband and wife, if they own the farm together, they will each be entitled to a maximum £1million of combined Agricultural and Business Property Relief, giving them a total allowance of £2million. In addition, they will also be entitled to the standard allowances of up to £1million set out above.

Another but – remember the rule about Residential Nil Rate Band being removed gradually if the estate is worth more than £2million? Under the current rules, regardless of any Agricultural or Business Property Reliefs, if the estate exceeds £2million you start losing the Residential Nil Rate Band.

If there is no change to that rule, it means that once a farming estate exceeds around £2.6million, there will be an IHT charge (not the £3million quoted by the Government). That’s the tipping point for the loss of Residential Nil Rate Band. For a single person owning a farm, the allowance could be £1.5million (provided their estate doesn’t exceed £2m). However, these figures cover all their estate, so personal possessions as well as the farmland, buildings and machinery.

The value of the estate qualifying for Agricultural or Business Property Relief that sits above these allowances is taxed at 50%. That is, 50% of the value is taxed at 40% IHT (which in effect is the reduced rate of 20%). It will apparently be possible to pay this over a 10-year period, interest-free.

Gifting

One last bit to add into the mix is gifting. If the rules change as set out above, this is going to be increasingly important to pass on farm assets prior to death. If you gift an asset before you pass away, the famous ‘7-year rule’ applies (for gifts that don’t qualify for some small exemptions which I won’t cover here).

The 7-year rule states that once 7 years have passed since the gifting of an asset, it can no longer form part of the estate. There is also a tapering of the IHT rate once three years have passed – being 32%, 24%, 16%, and 8% for years 3, 4, 5, and 6 respectively. That is, if you pass away 5 years after gifting £100,000, your inheritors would pay 16% IHT on that asset if it doesn’t fall within the allowances.

That is, I hope, a brief summary of the changes, but I hope it gives everyone greater clarity on what the changes might mean for them and their families.

One final point, and I am going to stray into opinion here. The reported rationale for these changes was the Government looking to close a loophole whereby some very wealthy individuals have been buying up farmland to benefit from Agricultural Property Relief as it stands.

If that is the case, why are the Government proposing a concession of 20% IHT on assets above the new allowances? The concession is unlikely to deter the super-rich from buying up more farmland because farmland will continue to be treated more beneficially than other assets.

I wonder whether offering a concession is an acknowledgement that there will be some collateral damage to family farms.

Would it not have been more sensible to set the allowances higher, whilst offering no concession above that level?

Robbie Jones is a financial adviser with a keen interest in Welsh politics