How has the inheritance tax plan for farmers changed?

The government has watered down its planned changes to inheritance tax that would have impacted thousands of farmers from next April.

The so-called ‘tractor tax’, which was first announced over a year ago, will see key changes to how agricultural and business property can be passed on.

However, the threshold at which this will kick in has now been substantially raised by the government – from £1m to £2.5m – following months of furious 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.

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“We have listened closely to farmers across the country and we are making changes today to protect more ordinary family farms.”

The move comes after a government-commissioned report warned ministers that British farmers are “bewildered and frightened” for the future of their industry, with many citing fears over changes to inheritance tax as a key concern.

Thousands of farmers have participated in a series of protests in the central London, several of which saw tractors driven to Parliament – often against the guidance of local police.

Here’s everything you need to know about the issue:

Previously, farming businesses qualified for 100 per cent relief on inheritance tax on agricultural property and business property.

But now the tax is being imposed on farms worth more than £2.5 million – increased from £1 million – with an effective tax rate of 20 per cent on assets above the threshold, rather than the normal 40 per cent rate for inheritance tax.

A 50 per cent relief will also continue to apply to qualifying assets above the new level.

This means that the actual threshold before paying inheritance tax could be as much as £5 million, once exemptions for each partner in a couple and for the farm property are taken into account.

The government has said “difficult decisions” had to be made to fill the multibillion fiscal hole it inherited from the Conservatives, and it is targeting the agricultural inheritance tax relief to make it fairer.

It said figures showed that 7 per cent of the wealthiest estates account 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’s only right that larger estates contribute more, while we back the farms and trading businesses that are the backbone of Britain’s rural communities.”

According to the Treasury, only 11 per cent of estates claiming agricultural property relief (APR) were above the £2.5 million threshold in 2022/2023, suggesting that nearly nine-in-ten farmers will now not fall within the scope of the changes.

In comparison, 31 per cent of estates claiming APR were above the £1 million threshold in the same period.

The amount of estates now expected to pay inheritance tax under the changes has dropped from around 530 to around 180 following the change.

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However, the National Farmer’s Union (NFU) says farm businesses have also qualified separately for business property relief, which can cover things such as harvested grain and livestock, machinery and diversified businesses such as camping on a farmer’s field.

Now the two are combined, with a single £2.5 million allowance before inheritance tax is levied, which could mean more farms are in scope.

But the government has countered this point by saying that looking at asset value alone does not necessarily mean a farm will be affected, as it depends on individual circumstances.

One of the key criticisms from the NFU was that the ‘tractor tax’ evidenced a lack of understanding from the government over how the farming industry works.

The union’s leaders argued that, while farms may have a high nominal asset value – the value of their land and business assets – the returns from farming are often very low, so farming families may not have the reserves to pay for inheritance tax liabilities without selling off assets.

NFU president Tom Bradshaw has welcomed the new changes, saying: “I am thankful common sense has prevailed and government has listened.”

He added: “The original changes to APR and BPR, contained within the finance bill, resulted in a pernicious and cruel tax, trapping the most elderly and vulnerable people and their families in the eye of the storm. The NFU and its members have stood strong for what we believed in.”

“From the start, the government said it was trying to protect the family farm and the change announced today brings this much closer to reality for many”.