The recent UK budget has introduced significant changes to Inheritance Tax (IHT) concerning agricultural property, effective from April 2026. These reforms are poised to impact the financial planning of farmers and landowners across the country.
Key Changes to Agricultural Property Relief (APR):
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Introduction of a £1 Million Allowance: The first £1 million of combined agricultural and business property will continue to receive 100% IHT relief. Assets exceeding this threshold will be eligible for a reduced relief rate of 50%, resulting in an effective IHT rate of 20% on the value above £1 million.
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Impact on Family Farms: While the government asserts that these changes will primarily affect wealthier estates, many in the agricultural sector express concerns. The National Farmers' Union (NFU) estimates that up to 70,000 farms could be impacted, potentially leading to the sale of family-owned farms to meet tax liabilities.
Our Example
Scenario:
- Farm Value: £3,600,000
- Agricultural Output: Milling-grade Wheat
- IHT Taxable Threshold: £2,000,000
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IHT Bill Calculation:
- Value above £2M = £3,600,000 - £2,000,000 = £1,600,000.
- IHT (20% on £1.6M) = £320,000.
Farm’s Financial Outlook:
- Market Price of Milling Wheat: £181/ Metric Tons (MT)
- Yield: 3.3MT/ acre
- Annual Turnover: £239,000
- Annual Farm Profit: £4,778
- Adjusted for the effective rate = £3,870.50 (post-tax).
- Annual Mortgage Costs: £18,156 (assuming a loan for £320,000 at 3.92% over 30 years).
- Interest per Annum: £8,000.
- Net Profit: £(4,129) annually.
- Net Cash Flow Loss: £(13,636) annually.
Industry Response:
The agricultural community has voiced strong opposition to these reforms. Thousands of farmers have protested in London, arguing that the changes threaten the viability of family farms and could lead to increased food prices due to reduced domestic production.
Government's Position:
The government maintains that the majority of farms will remain unaffected by these changes, emphasizing that the reforms target only the wealthiest estates. They argue that the adjustments are necessary to ensure a fairer tax system and to prevent the misuse of APR by non-farming investors.
The forthcoming changes to IHT and APR represent a significant shift in the taxation of agricultural property in the UK. Farmers and landowners should seek professional advice to understand the implications for their estates and to explore potential strategies for mitigating tax liabilities under the new regime.