How has the inheritance tax plan for farmers changed?
The government has softened its planned changes to inheritance tax, which will affect thousands of farmers from next April.
The so-called ‘tractor tax’, first announced more than a year ago, will lead to significant changes to how agricultural and commercial property is transferred.
But the threshold at which this comes into play has been raised significantly by the government – from £1m to £2.5m – following months of angry backlash to the changes.
Announcing the U-turn, Environment Secretary Emma Reynolds said: “Farmers are at the heart of our food security and environmental stewardship, and I am determined to work with them to secure a profitable future for British farming.
“We listened closely to farmers across the country, and today we’re making changes to protect more ordinary family farms.”
The move comes after a government report warned ministers that British farmers were “confused and frightened” about the future of their industry; Many people have cited fears about changes to inheritance tax as a key concern.
Thousands of farmers took part in a series of protests in central London; Many of these saw tractors being driven into Parliament, often against the direction of local police.
Here’s everything you need to know about the problem:
What are the changes in agricultural tax?
Previously, farming businesses were eligible for a 100 per cent reduction in inheritance tax on agricultural and commercial properties.
However, the tax now applies to farms valued at more than £2.5 million (increased from £1 million) and the effective tax rate on assets above the threshold is 20 per cent, rather than the normal 40 per cent rate for inheritance tax.
This means that once exemptions are taken into account for each joint and farm property in the couple, the actual threshold before paying inheritance tax could be as much as £5 million.
Why were the changes introduced?
The government has said “tough decisions” must be made to fill the multibillion-dollar fiscal gap inherited from the Conservatives and is targeting an agricultural inheritance tax cut to make it fairer.
The figures showed that 7 per cent of the wealthiest estates accounted for 40 per cent of the total value of agricultural property relief, costing the Treasury £219 million.
But explaining the rationale behind the updated threshold, Ms Reynolds said: “It is right that larger properties contribute more as we support the farms and commercial businesses that form the backbone of Britain’s rural communities.”
How many farmers will be affected by the changes?
According to the Treasury, just 11 per cent of properties claiming agricultural property relief (APR) were above the £2.5 million threshold in 2022/2023; This means almost nine out of ten farmers will no longer be covered by the changes.
By comparison, 31 per cent of properties claiming APR were above the £1 million threshold in the same period.
The amount of estates expected to pay inheritance tax within the scope of the change decreased from around 530 to around 180 after the change.
However, the National Farmers Union (NFU) says farm businesses also qualify individually for commercial property relief, which can cover a variety of businesses such as harvested grain and livestock, machinery, and camping on a farmer’s field.
Now the two have been combined into a single allowance of £2.5 million before inheritance tax is levied, which could mean more farms are covered.
However, the government countered this point, saying that looking only at asset value does not mean the farm will be affected, as it depends on individual circumstances.
How did farmers react to the update?
One of the NFU’s key criticisms was that the ‘tractor tax’ demonstrated the government’s lack of understanding of how the agricultural sector works.
Union leaders point out that although the nominal asset value of farms is high (the value of land and business assets), returns from farming are often very low, so farming families may not have the reserves to pay their inheritance tax liabilities without selling their assets.
NFU president Tom Bradshaw welcomed the new changes and said: “I’m grateful that common sense prevailed and the government listened.”
He added: “The original changes to APR and BPR in the finance bill resulted in a harmful and draconian tax, leaving the oldest and most vulnerable people and their families stranded in the eye of the storm. The NFU and its members stood strong for what we believe in.”
“The government has said all along it is trying to protect the family farm, and the change announced today brings this closer to reality for many.”
