How many farms will be impacted by the new inheritance tax rules?

An estimated 13,000 farmers travelled to Westminster this week to protest against proposed changes to inheritance tax announced in the Budget. 

But there’s been disagreement over how many of the UK’s 209,000 farm holdings may be required to pay more tax as a result of the changes. The government insists that only around 500 estates a year will end up paying more, but others, such as the Country Land and Business Association (CLA), put the total figure of farms affected at 70,000.

These figures actually refer to two different things. We take a look at what they mean. 

What changes has the government proposed?

Inheritance tax (IHT) is a tax paid on the estate of someone who has died. Normally, estates worth less than £325,000 are not taxed, with a further £175,000 of relief given if a home is left to children or grandchildren, giving a total of £500,000 tax free. In 2021/22 around 4% of estates were liable for IHT.

Since 1984 farmers and agricultural land and business owners have been exempt from IHT, but this is set to change. During her Autumn Budget speech chancellor Rachel Reeves said: “From April 2026, the first £1 million of combined business and agricultural assets will continue to attract no inheritance tax at all, but for assets over £1 million, inheritance tax will apply.”

Farmers can continue to claim the £325,000 allowance mentioned above, as well as the additional allowance for passing their homes to children or grandchildren. This means that, in practice, farming estates worth up to £1.5 million would not be taxed. In the case of a married couple or a farm owned by two people, the allowance doubles to £3 million. 

IHT would be due on any amount above this. The standard rate is 40% but farm estates will be charged half this rate. In addition, while the total sum of any IHT due is normally payable upon death, farmers will be able to pay this amount over the course of ten years, interest free. 

In line with wider rules, if farms are gifted to family members at least seven years before death no IHT is payable. If the gifts are made between three and seven years before death, the tax rate charged falls on a sliding scale. 

How many farms does the government claim will pay more?

The government has said around 500 “claims” each year will be affected by the changes and that these figures are “based on the latest available information from HMRC on actual claims for Agricultural Property Relief”.

This is based on government analysis of claims for this relief from farms worth £1 million or more between April 2021 and March 2022. It found 462 farms fell into this category.

But agricultural land values have risen sharply in recent years. This means it is likely that more farms may exceed the £1 million threshold, though this does not necessarily mean they will actually have to pay IHT. 

Ms Reeves and government sources have also been reported as having said that 72% of farms will be unaffected by the tax changes. This figure, which suggests 28% of farms—equivalent to more than 50,000 of those in the UK—will have to pay IHT, does not align with the 500 farm figure.

It is possible that this is a slight mis-reporting of the statement made by Ms Reeves during the Budget, where she stated that “three quarters of claims” would be unaffected by the changes. The 462 claims above £1 million during 2021/22 represent 27% of all the claims made that year. So it may be that the figure refers to the percentage of annual claims affected rather than the percentage of all farms.

The Treasury confirmed to Full Fact this interpretation of the 72% figure. 

How many farms do agricultural organisations say will be affected?

The CLA claims that as many as 70,000 farms could be affected. This number is based on data from Defra (Department for Environment, Food & Rural Affairs), which has recorded that there are 30,000 farms in the UK that are between 50 and 100 hecatares and a further 40,000 that are larger than 100 hectares. 

The average price of farmland is £9,250 per acre (as of March 2024). With one hectare being equivalent to around 2.4 acres, every farm that has more than 50 hectares of land is going to be worth more than £1 million. 

But this calculation only accounts for the value of the land itself—agricultural machinery and buildings means farms with smaller acreage may also exceed the £1 million threshold. The CLA told Full Fact that, factoring this in, a farm over 50 hectares is likely to be worth over £2 million while farms over 100 hectares will definitely be worth over £2 million. 

However, the 70,000 figure is not comparable to the government’s 500 figure, as it represents the total number of farms that might potentially pay the tax in the future, rather than the number expected to pay on an annual basis. It is also based on the £1 million value threshold, without allowing for the various reliefs available for farm property and to married couples which, according to the government, together take the threshold up to £3 million. 

The CLA acknowledges that its calculations are looking at the impact on farms over a generation (which it defines as 40 years), rather than over a single year as with the government’s claims data. Even if the government figures were accepted, the CLA told us that 20,000 farms would be impacted over the course of the next 40 years. 

Another calculation of how many farms will be affected comes from the National Farmers Union (NFU). During a speech at Tuesday’s London protest, president Tom Bradshaw said: “our estimation is that 75% of commercial farm businesses are caught in the eye of this storm.” 

The NFU has produced analysis to support its position and says that when “non-commercial” farms are removed from government figures and values adjusted to current market conditions, the proportion of farms impacted increases significantly.  However, the NFU has not provided an actual figure of the number of farms that meet this definition of “commercial farms”.

Some experts have pointed to estate planning as an option

Whatever the number of farms that might meet the threshold for paying IHT, some have pointed out that the numbers who end up paying the tax could be smaller as a result of estate planning. Rob Hitch, an accountant specialising in farms, says that small farms worth less than £3 million will not be affected by the changes. He points out that, with proper estate planning, it is possible to reduce or avoid inheritance tax, and that, as farmers have previously not had to concern themselves with this, many appear to be unaware of this. 

Data shows that 68% of farmers are aged 55 or over, with 38% aged over 65. 

An additional factor to be considered is that not all farmland is in the hands of actual farmers. The latest data shows more than half of all the farmland sold in 2023 was purchased by private, institutional or “lifestyle” investors.