Why Agricultural Property Relief reforms pose challenges for farming families

An unprecedented wave of anger has erupted among British farmers in response to changes to Agricultural Property Relief and Business Property Relief announced in the recent budget by Chancellor Rachel Reeves. The sight of young children whose parents are farmers bearing placards at the helm of the protest was certainly provocative, and one which perfectly symbolised the apparent injustice of the proposed new inheritance tax (IHT) rules.

Indeed, it is clear to see why these major reforms of tax policy have been perceived as a sudden and unjustly severe blow against communities which are already struggling. Many farmers who have inherited their lands and livelihoods feel that they will be unable to hold onto farms which have been in their family for generations.

So, what exactly are the changes which have caused such fury and led to one of the largest and most public demonstrations in London for some time? 

What is Agricultural Property Relief?

This is an inheritance tax relief for land or pasture that is used to grow crops or to rear animals. It includes stud farms for breeding and rearing horses, trees that are planted and harvested at least every 10 years, land not currently being farmed under the Habitat Scheme, land not currently being farmed under a crop rotation scheme, milk quotas associated with the land, farm buildings, farm cottages and farmhouses in certain circumstances. It excludes land kept for keeping animals for sports, fishing and shooting, farm equipment and machinery, derelict buildings, harvested crops and livestock.

Farms may also meet the criteria for Business Property Relief an inheritance tax relief for businesses.

The disadvantage of Agricultural Property Relief over Business Property Relief from an IHT perspective is that the tax relief is on the agricultural value of the land and buildings which may be much lower than the actual market value. Whereas assets that qualify for Business Property Relief obtain relief at the actual market value as at the date of death.  

If a farm asset meets the criteria for both reliefs, only the Agricultural Property Relief will apply. So, with Agricultural Property Relief, you are usually going to be paying a certain amount of IHT on the excess above the agricultural value up to the current market value (if different) as at the date of death. 

Any land not qualifying for Agricultural Property Relief, for example land used for grouse shooting, may qualify for Business Property Relief.

Since 1995, Agricultural Property Relief has relieved 100 percent of an individual's agricultural land from IHT and the same was the case for Business Property Relief. Under the new reforms, which are due to come into effect in April 2026, the value of farming assets qualifying for Relief will be aggregated with any assets qualifying for Business Property relief and capped at £1m per farmer. Anything above this cap will be taxed at 20 percent.

Agricultural Property Relief relieves the agricultural value of the land (ie not the market value or the development value of the land). It covers the circumstances where a farmer owns and uses the land himself for agricultural purposes and the situation where the landowner lets the land for agricultural purposes to a third party. Depending on the date the Lease was signed it may only qualify for 50 percent Agricultural Property Relief. If it was after the 1 September 1995 then it could qualify for 100 percent up to the cap.

There are a number of nuances such as this that would need to be considered. 

How does Agricultural Property Relief affect farmers?

It is possible for an asset to qualify for both Agricultural Property Relief and Business Property Relief. However, where this is the case, Agricultural Property Relief takes priority over the Business Property Relief. Land will qualify for Business Property Relief where animals are kept for sport or there are fishing or shooting rights attached to the land provided it is commercially run as a business. Such activities are specifically excluded from Agricultural Property Relief but would qualify for Business Property Relief and so you get the full market value for the assets. 

Moreover, some farms also have holiday cottages attached, and this is a factor which must considered. Holiday cottages do not qualify for Business Property Relief unless they are actively managed by the owners - for example, if they ran a business offering shooting and fishing and it was not just the case of changing bedding on exit - then there is potential for the value of those cottages to be fully exempt from IHT after two years up to the caps. 

In respect of farms with a farmhouse, these also do not necessarily obtain Agricultural Property Relief. Instead, it depends on whether farmhouses have the appropriate character. Therefore, where a small farmhouse may qualify for Agricultural Property Relief (ie its agricultural property value not market value), it would only do so if it was the hub of farming activity, and it must be occupied by the farmer. This would mean that it would not qualify if the farmer had an external office to run the business, as there is no Business Property Relief if its main use is just residence. 

The critical factor is that these assets must be owned for two years before they can qualify for Business Property Relief or Agricultural Property relief and actually run as a business (or as an agricultural business) for those two years. 

If the farmhouse does not qualify for Agricultural Property Relief, it may benefit from Private Residence Relief which all homes benefit from when the home is left to direct descendants.

What next for farmers?

Following the Budget, however, reforms to Agricultural Property Relief are likely to pose a number of complex issues for farmers to navigate. 

With the new reforms to Agricultural Property Relief capping at £1m per farmer, should they be unable to pay the IHT farming families may therefore potentially be forced to sell parts of the farm or be forced to go into partnership with their children to mitigate tax exposure and keep a hold on their farms - many of which have been passed through the family for generations.

The Country Land and Business Association (CLA) claims that the IHT changes could harm up to 70,000 farms, around a third of the total in the UK. Meanwhile the National Farming Union (NFU) says the tax will affect 66 percent of farms and will have a knock-on effect on the viability of the industry to provide enough food. 

The UK already produces less than 60 percent of the food it consumes, and this is expected to reduce further. More objective analysis, however, suggests that the real figure is likely to be closer to the government’s estimate of around 500 estates a year.

According to the projections put forward by the chancellor and other ministers, including the Environment Secretary Steve Reed, around three-quarters of estates will actually be unaffected.

Regardless of how many farming families are ultimately hit by the reforms to IHT and Agricultural Property Relief, there is undoubted concern across the sector. Many farmers who live a relatively frugal existence but maintain an estate and agricultural assets worth more than £1m simply to make ends meet have expressed great concern over these proposals.

Since the budget was brought before MPs in the House of Commons, many solicitors have seen an increase in the number of clients requesting meetings to discuss the changes to Agricultural Property Relief. Whereas previously estate planning was mainly via Wills or lifetime trusts, it is now likely to take a different tack. 

In the case of many farmers who find that their properties come above the threshold, it is going to be a case of lifetime planning and lifetime gifting.

Farmers will have to make use of family investment companies where the value of the parents’ shareholding is frozen and future growth is held within the children’s shareholding, thereby mitigating the parents’ exposure to IHT. Parents can decide how much control to give their children with bespoke shares. The inevitable effect of this is that children are going to receive farming assets sooner, during their parents’ lifetime.

Overall, each farm must be looked at on a case-by-case basis to determine how to maximise Agricultural Property Relief and Business Property Relief. It is therefore crucial that farmers instruct a land agent to determine which parts of the property would qualify for Agricultural Property Relief following the Budget, so as to ensure they are prepared for the incoming changes and able to weather the storm of IHT reform.