What are the changes to agricultural property relief?

What are the changes to agricultural property relief?

Reforms announced at Autumn Budget 2024 will help raise money to fix the public finances while protecting small family farms from unfairly high inheritance tax.

What are the changes to agricultural property relief?

Agricultural property relief and business property relief will be reformed from 6 April 2026.

The allowance for the 100% rate of relief will be set at £2.5 million, with a 50% rate of relief thereafter. This means a couple will be able to pass on up to £5 million of agricultural or business assets between them, on top of the existing allowances such as the nil-rate band.

The reforms to agricultural property relief and business property relief mean that only a small number of estates with agricultural and business assets will pay additional inheritance tax. The government estimates that up to 185 estates claiming agricultural property relief, including those also claiming business property relief, are expected to pay more inheritance tax in 2026-27. This means 85% of all estates claiming agricultural property relief in 2026-27, including those that also claim for business property relief, are forecast to not pay any more inheritance tax as a result of the changes.

The government is committed to reforming agricultural property relief and business property relief, while supporting farms and businesses. This reform will support the government with its objectives to fix the public finances, and fund public services. 

What is agricultural property relief?

Agricultural property relief is a type of inheritance tax relief. It reduces the amount of tax that farmers and landowners must pay when farmland is passed to the next generation.

Business property relief is similar, but for business assets that are part of the estate.

What is changing from 6 April 2026?

From 6 April 2026, the full 100% relief from inheritance tax will be restricted to the first £2.5 million of combined agricultural and business property. 

Above this £2.5 million allowance, impacted individuals will access 50% relief from inheritance tax on qualifying assets and will pay inheritance tax at a reduced effective rate of up to 20%, rather than the standard 40%. This tax can be paid in equal instalments over 10 years interest free.

This is on top of the other spousal exemptions and nil-rate bands that people can access for inheritance tax too. All individual estates have £325,000 tax-free threshold for inheritance tax (the nil-rate band).

Any unused £2.5 million allowance on the death of a spouse or civil partner is transferable to a surviving spouse or civil partner. This makes it like the nil-rate band.

This means a couple will be able to pass on up to £5 million of agricultural or business assets between them, on top of the existing allowances such as the nil-rate band.

The below examples are an assumption based on the £2.5 million allowance and nil-rate band and do not take into consideration other specific circumstances that may affect the tax calculation. In some circumstances individuals will be able to pass on more inheritance tax free. For example, if the estate contains relatively few assets that do not qualify for agricultural or business property relief, meaning the nil-rate band can apply to assets qualifying for the 50% rate of relief on agricultural or business property over the £2.5 million allowance. Additionally, the £175,000 residence nil-rate band is tapered-away for estates over £2 million, so whether this applies will depend on the facts of the estate.

Example 1: farm owned by a couple either married or in a civil partnership

A farm owned by one or both members of a couple, either married or in a civil partnership, can be passed on tax free up to £5.65 million.

A surviving spouse or civil partner can benefit from an additional £2.5 million allowance for qualifying agricultural or business assets. This is in addition to any unused nil-rate bands.

This is regardless of whether the farm is owned jointly or solely by one member of the couple.  The £2.5 million allowance can be transferred to their spouse on death if unused, leaving the surviving spouse with £5 million allowance to use against any agricultural assets in their estate.

Person 1: All assets are transferred to spouse/civil partner benefitting from spouse relief so will be inheritance tax free. Unused £325,000 + £2.5 million allowances are transferred to Person 2 on death

Person 2: £650,000 (made up of £325,000 + £325,000) + £5 million (made up of £2.5 million + £2.5 million)

Total passed on tax free: £5.65 million

If the first death was before 6 April 2026, it will be assumed the entirety of the £2.5 million allowance will be available for transfer to the surviving spouse or civil partner.

Example 2: farm owned by two people

Two people (such as siblings) who jointly own a farm will be able to pass on a farm up to £5.65 million tax free. That is made up of £650,000, combining each of their standard £325,000 nil-rate bands, and on top of that, a £2.5 million tax-free allowance each for agricultural assets in their estate.

Person 1: £325,000 + £2.5 million

Person 2: £325,000 + £2.5 million

Total passed on tax free: £5.65 million

Example 3: farm owned by one person

One person who owns a farm will be able to pass on land and property valued up to £2.825 million tax free. That is made up of their standard £325,000 nil-rate band  and an additional £2.5 million tax-free allowance for agricultural assets in their estate.

Total passed on tax free: £2.825 million (£325,000 + £2.5 million)

Why is the government reforming these reliefs?  

The government is better targeting these reliefs to make them fairer. 

Figures published at Autumn Budget 2024 show that the top 7% (the largest 117 claims) account for 40% of the total value of agricultural property relief. This costs the taxpayer £219 million in 2021-22. The top 2% of claims (37 claims) account for 22% of agricultural property relief, costing £119 million in 2021-22.

It is not fair for a very small number of claimants each year to claim such a significant amount of relief, when this money could better be used to fund public services.

How does this impact other ways of passing on farmland?

Full exemption for transfers between spouses and civil partners continue to apply. This means that any agricultural and business assets left to a spouse or civil partner will be tax free. 

Any gifts to individuals more than seven years before death will continue to fall fully outside the scope of inheritance tax. The effective rate of tax paid on gifts within seven years of death tapers down from 3 years after the transfer depending on circumstances.

What other funding is available to farmers?

The government has allocated a record £11.8 billion to sustainable farming and food production over this Parliament. This includes the largest financial investment into nature-friendly farming ever and increases support for nature friendly farming through Environmental Land Management schemes from £800 million in 2023-24 to £2 billion a year by 2028-29.