Budget inheritance tax changes 'will hit fewer than 500 farms a year'

Less than 500 farms per annum will likely be affected by the Government's inheritance tax reforms, according to a leading thinktank.

Disputing figures provided by the Government itself, Institute for Fiscal Studies (IFS), claimed "significantly fewer" than 500 farms yearly will face the tax changes.

The organisation pointed out "relatively simple tax planning" could prevent farms valued at more than £2 million from reaching the tax payment threshold.

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In its briefing note, the IFS endorsed the inclusion of farms in the inheritance tax scope, but suggested different techniques if concerns about food production arise, advocating for "better tools" to address them.

Nonetheless, it also urged the Government to offer farm owners close to the end of their lives - those not guaranteed to benefit under the new rules due to begin in 2026 - the chance to avoid inheritance tax through lifetime gifts, similar to other property owners.

"If the Government wished 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 agricultural property made before a certain future date inheritance tax free, regardless of the timing of the death," the IFS said in its briefing.

In a significant shift, Chancellor Rachel Reeves has revealed in the Budget that farmers will now face inheritance tax on agricultural property and land valued over £1 million at a 20% rate, abandoning the previous zero charge. Couples with farms are being treated to a higher threshold of £3 million when passing on their assets.

While government officials believe around three quarters of farmers won't feel the impact of this change, the National Farmers Union (NFU) is not convinced.

The NFU's worry stems particularly from the amalgamation of agricultural property tax relief with business property relief, which they argue could ensnare more farms within taxation territory.

Echoing this concern, David Sturrock, a senior research economist at the IFS said: "If we have an inheritance tax it should apply equally across all types of assets, unless there are compelling reasons to deviate from that.

"Inheritance tax relief for agricultural and business assets favours those whose wealth is held in these forms rather than others.

"It also provides a tax incentive for agricultural land to be used by the wealthy as a way to avoid inheritance tax.

"That is unfair, inefficient and creates economic costs.

He added: "Those objecting to the change claim that paying IHT (inheritance tax) will have detrimental effects on food production or the environment.

"But if Government wishes to promote food production or certain uses of land, there are much better ways of doing so than through an inheritance tax break."

The Liberal Democrats have labelled the IFS's suggestions a complete "overhaul", accusing ministers of using the think tank as a shield to validate their changes.

Tim Farron MP, the Lib Dem's spokesperson for the environment, added: "It would be beggars belief for the Government to continue to push forward with these stupid plans.

"They need to swallow their pride, realise the damage this family farm tax will do and axe the tax."