Ploughing through change: How Inheritance Tax reforms could reshape farming futures

This weekend in Cambridge, I came across a gathering of tractors on Parker’s Piece, and it was immediately clear why they were there. The NFU (National Farmers' Union) was rallying to draw attention to the recent changes in inheritance tax, under the banner: ‘Stop the Family Farm Tax.’

As is often the case, it’s a minority that spoils things for the majority. There have been anecdotal reports of wealthy individuals purchasing farms, not for agricultural purposes, but primarily to take advantage of inheritance tax relief and pass farmland to the next generation tax-free.

The impact of IHT relief on farmland values

In 1992, John Major introduced Agricultural Property Relief, which exempted 100% of farms from inheritance tax (IHT). Using Savills’ rural research on farmland values, we can explore how this exemption may have influenced land prices. At the time of the relief’s introduction, farmland was valued at approximately ￡5,000 per acre.

While farmland values are shaped by a variety of factors—including the availability of cheaper imports, food inflation, and pricing pressures from supermarkets and wholesalers—the IHT exemption became a significant driver.

Farmland prices eventually rose to a peak of ￡12,000 per acre, though they have since eased to around ￡9,000 per acre. Despite this decline, there remains some artificiality in the current pricing, partly linked to the IHT relief.

To put this into perspective, the average income return on farmland is around ￡66 per acre. For a 200-acre farm, valued at ￡1.8 million, this translates to an annual return of just ￡13,200—less than 1% return on capital. Even if the income per acre increased to ￡150, the return would still only amount to ￡30,000, or 1.6%.

Is IHT relief a problem?

The key question is whether the IHT relief on farmland is truly an issue. To qualify for the relief, the land must be actively farmed. It’s well-known that figures like James Dyson, who owns 36,000 acres of farmland, and Jeremy Clarkson would be benefiting from this relief. But does this present a problem? After all, they are actively farming their land.

However, the impact of inflated farmland values shouldn’t be overlooked. Like how a too-buoyant rental market can hinder first-time buyers from stepping onto the property ladder, inflated farmland prices can create barriers for new entrants into farming or prevent tenant farmers from purchasing land themselves.

Additionally, the financial return on farmland is a concern. With returns of less than 1%, this level of investment is far from sustainable in the long term.

Implications of IHT reform

If we delve deeper into the potential impact of IHT reform, removing or restricting the relief could significantly reduce the market value of farms. This creates a double financial blow for current farm owners: a loss in asset value and increased tax liabilities.

For example, let’s take a 200-acre farm currently valued at ￡1.8m (￡9,000 per acre). If IHT relief changes cause the price per acre to drop to ￡6,000, the farm's value would fall to ￡1.2m. On this, ￡200,000 would be liable to 40% IHT, leaving the owner with ￡1,120,000. Factoring in the ￡680,000 reduction in value, the farm’s overall worth would decline by around a third due to the combined effects of falling prices and the loss of IHT relief.

The implications for farm owners are clear: significant reductions in wealth and potentially severe financial challenges.

Potential solutions

One approach to addressing the issue could be to further limit IHT relief to those actively farming the land themselves. This would ensure the relief supports genuine farming activity rather than being used as a tax shelter.

If this is the solution offered to the long-term pricing of farmland, a phased reduction in IHT relief might provide a more balanced alternative. For example, the current 100% relief could decrease to 90% from April 2026, then to 80% from April 2028, and so on. Gradual changes like these would likely mitigate significant disruptions to farmland prices, avoiding the catastrophic impact of an immediate drop from 100% to 0%.

Mitigation is possible through various means, with lifetime gifting of assets being the primary consideration. By using as many ￡1 million exemptions as possible within the family unit, some relief could be achieved. Generally, HMRC discourages transactions where the motive is purely for the avoidance of taxation, but in this instance the farming community feels like it is being forced to do exactly that—forced into lifetime gifting purely in response to the government’s tax changes.

Ultimately, the planned reforms feel like a blunt instrument aimed at addressing what is perceived as a flaw in the system—a step toward implementing a limited form of wealth tax. Whether they achieve their intended outcome without unintended consequences remains to be seen.