Ministers should give farmers an inheritance tax break to prevent unfair treatment under upcoming tax changes, according to the Institute for Fiscal Studies (IFS).
The IFS has warned that the government’s proposed changes to agricultural taxes risk treating some landowners unfairly and could impact food security if not appropriately mitigated. Last month, Chancellor Rachel Reeves announced in her Budget that farmers with businesses worth more than £1m could be subject to a 20% inheritance tax, sparking tractor protests outside Parliament.
Previously, the government promised not to make any changes to the agricultural property exemption, which resulted in farmers being exempt from inheritance tax. The new IFS analysis concludes that although it is largely fair to treat agricultural assets like other taxable assets, special considerations are necessary to avoid unintended consequences.
David Sturrock, chief research economist at the IFS, said: “Existing farm owners who die in the next seven years (but after the new regime comes into effect in April 2026) will not have the opportunity to avoid inheritance tax by making lifetime gifts.” . If the government wanted to give current farm owners the same opportunity to avoid inheritance tax as owners of other assets, it could, for example, make lifetime gifts of farm property made before a certain future date exempt from inheritance tax, regardless of the timing of death. “
Treasury officials are said to be evaluating relaxing the policy, including amending gifting rules for over-80s so they can pass on their farms without having to live for seven years after making a gift.
Despite the pressure, Chancellor Reeves is understood to be holding firm, aiming to target wealthy investors who buy land to avoid inheritance tax – a practice blamed for driving up land prices. Labor insists that policy focuses on fairness and preventing tax evasion.
However, many farmers argue that although they may be asset rich due to land ownership, they are often cash poor. Declining farm incomes, ballooning costs, poor harvests, and fierce competition among retailers mean that many farmers earn less than the minimum wage.
Tax expert Dan Needle has conducted research suggesting that tax changes may hurt working farmers more than tax evaders. He proposes equalizing the inheritance tax at 40%, but making it payable only when land is sold, thus avoiding the impact on those who wish to pass on the family farm to relatives. Needle also proposes a “clawback” mechanism where the inheritance tax break is restored if inherited farmland is sold within a certain time frame.
It also recommends raising the maximum inheritance tax to around £20m, so that only the largest and most sophisticated agricultural companies are affected.
Tim Farron, the Lib Dems’ environment spokesman, commented: “The government has hidden behind the IFS to try to justify this disastrous policy. And this same organization is now telling them their proposals need an overhaul.”
A Treasury spokesperson responded: “As the IFS has said, the current rules for these exemptions are unfair and ineffective. We remain committed to full implementation of the policy and are not considering relaxation.