How UK Farmers Can Prepare for the Inheritance Tax Shakeup

Farmers have been taking to the streets of London and cities around England to protest the inheritance tax measures in the last UK budget—the effect of which will be felt by landowners and tenant farmers.

The new rules, which take effect April 6, 2026, will restrict the availability of two main reliefs that previously enabled most farms to fall out of the inheritance tax net. These reliefs—agricultural property relief and business property relief—were set at 100% in most circumstances. The new rules limit the reliefs to a combined total of £1 million ($1.23 million) at 100%, with any value above this attracting only 50% relief.

Farmers and their families have several options to consider in light of the new rules.

Before any action is taken, farming landowners must understand the extent of any liability by considering the full valuation of the farming business. Simple gifts and well-drafted wills may eliminate any problem, but more substantive planning might be required.

The Department for Environment, Food and Rural Affairs published data in July 2024 that showed the average net income of a farm across all types of farming in Great Britain was £86,000, with 17% of farms making no profit at all. This means that payment of any inheritance tax out of farming profits or rental income, if the farm is tenanted, even if paid over 10 years with no interest, will be difficult or perhaps impossible.

Below is a hypothetical example (not to be used as a basis for valuing farmland) of the inheritance tax position under current rules and under the new system, showing a widow who has died and passed the family farm to her children with no transferable allowances available from her late husband.

In this example, 10.5% of the farmland would need to be sold to pay the inheritance tax if there are no other assets. The example ignores the working capital of the farm (such as stock and farm machinery) and any possible uplift in value of the land due to development potential, both of which are often substantial and would only be eligible for 50% relief in this case, increasing the tax liability even more.

A third of farmland in England is tenanted. The potential sale of farmland outlined above therefore leaves tenant farmers in a vulnerable position with the possibility of tenancies not being renewed or introducing a new, potentially unknown, landlord.

Reducing Inheritance Tax

With any asset that doesn’t qualify for full relief, there are two basic options: Die with it or pass it on before death.

Tax and non-tax considerations must be weighed equally—especially the income needs of the farming family for the rest of their lifetime. Any benefit that is retained by the donor, including income, will mean that the gift might not fall out of the inheritance tax estate as expected.

Lifetime giving usually triggers capital gains tax, but this can usually be deferred for farming assets. If gifted assets are sold in the future, this deferral could result in a saving of inheritance tax at 20% but capital gains tax at 24% on sale. The double tax trap—where the donor doesn’t survive seven years from the date of the gift—would be even worse.

Careful preplanning can mitigate negative tax consequences. Depending on the size of the farm, it might not be necessary to make any gifts. Careful will planning and correct ownership of the farming assets between spouses or civil partners can make maximum advantage of two lots of relief of £1 million at 100%.

If the total value of assets is below £2 million per spouse, (on the basis they have done no gifting in the previous seven years) they will have their nil rate band and residence nil rate band totaling £500,000 available to pass tax free. This would enable £3 million of assets as a couple to pass to the next generation tax-free on death.

Unlike the nil rate band and residence nil rate band, at present it is understood that there will be no opportunity to transfer any unused 100% Agricultural relief to a surviving spouse or civil partners.

If assets exceed £3 million or available 100% relief, gifting may be made easier using a partnership to bring family members into the business, retaining a degree of control with a carefully curated partnership agreement. A partnership offers flexibility on profit sharing and asset ownership but careful thought must be given to constructing legacies for non-farming family members, as the assets belong to the partnership and not the partner.

After seven years, gifts to individuals fall outside of the donor’s estate meaning that the £1,000,000 relief at 100% won’t be used against these gifts. Early planning could reduce farming business assets to a level where the remaining assets are covered by the 100% relief. It will be important for those making lifetime gifts to take care if there are any borrowings secured on the assets so as to not trigger a Stamp Duty Land Tax charge.

Although there are costs and potential complexities involved in having a trust, a significant advantage is their use in protecting assets for the family blood line. Relationship breakdown can often result in assets going outside of the family and a trust can give gifts a degree of protection, also enabling the donor to maintain control as a trustee.

The Treasury still needs to produce legislation and guidance on how the new rules will affect the tax charges on trusts but it should be possible for an individual to put up to £1.65 million of an agricultural business into a trust without an inheritance tax charge and a further £650,000 every seven years following. Trusts shouldn’t be entered into lightly, but they can be a part of a solution to an inheritance tax problem, especially where not all the family is involved in farming.

This article was first published in Bloomberg Tax in February 2025