Analysis: Why the Treasury has it so wrong on impact of IHT on farms

Fresh analysis from the NFU has set out exactly why the union believes Treasury claims that only about a quarter of farm businesses will ever be caught by its inheritance tax (IHT) provision are utter nonsense.

Ever since the Budget on 30 October, the Treasury has insisted that only around 500 farming estates a year will be caught by the 20% tax, while almost three-quarters of farms will never be affected.

See also: Farmer Focus – Betrayed and disgusted by Labour Budget

In a recent letter to the Treasury Select Committee, chancellor Rachel Reeves also defended her approach of using the number of past claims for agricultural property relief (APR) as the basis for these estimates, rather than Defra’s figures based on asset value.

“It is not possible to infer a future inheritance tax liability from data on farm asset values,” she wrote.

“How many people would be impacted by this change is affected by many things, such as who owns the business, the nature of that ownership, and how many owners there are.”

Despite this, the NFU is adamant that the government’s claim that just 27% of farms will be affected by IHT, after allowing for allowances, “materially underestimates the true proportion”.

“We find that around 75% of commercial family farms will be above the £1m threshold,” it says in a new briefing document.

The analysis also finds that the majority of medium-sized working farms that will be liable for IHT from April 2026 will not be protected by having a 10-year payment window.

“Put simply, the majority of farms don’t earn enough money to pay the potential IHT bill without selling off some of their land, which in turn makes the farm business unviable,” the union says.

Three reasons

The NFU’s analysis highlights three reasons why it believes the Treasury’s claims are unreliable:

First, not all the APR claims the Treasury points to relate to working farms.

Just by removing non-commercial farms and smaller blocks of bare land that are simply rented out by landowners from the Treasury’s estimates, the proportion of commercial farms liable for IHT increases “significantly”.

It notes that holdings of less than 20ha account for 44% of all registered holdings, but just 4% of the total UK land area.

“Removing them [from the number of APR claims] increases the estimated proportion of affected working farms from 27% to 49%,” says the union.

Second, the NFU says the Treasury’s figures are based on 2021-22 APR data, which is not representative of what the situation might be in April 2026, when the 20% IHT on farms worth more than £1m kicks in.

“Land prices have grown rapidly since 2021, bringing more farms in scope of the measure,” it says.

It estimates that, using projected land values for 2026, that would bring another 25,000 farms into play for IHT, “raising the proportion of working farms impacted to 70%”.

Third, by considering APR alone, the Treasury does not capture the impact of claims for business property relief (BPR), which also has to fit under the same £1m ceiling.

The fact that 40% of farmers also claim BPR on things like machinery and livestock makes the IHT allowance even more restrictive.

“Factoring in the additional impact from the changes to BPR lifts the proportion of affected working farms to 75%,” says the union.

Other allowances

The NFU also dismisses the claims made by government ministers since the Budget that other nil-rate allowances available to married couples will exempt most family farms from IHT.

“Even if we consider an optimistic £2m threshold before the tax takes effect, for many medium-sized farms, IHT bills spread over 10 years would wipe out the majority of their returns, while for many large farms it would reduce returns by a half,” it says.

The analysis explains that, while on average IHT repayments over 10 years would equate to 1-1.8% of a farm’s asset value (depending on farm size), current returns on capital average just 0.2% on farms in England.

Cereal farms are seen as especially vulnerable.

“Considering typical historic returns on an average cereals farm, and factoring in the reduction in direct payments, a farm making a profit of £34,000 will be hit with 10 annual IHT instalments of £53,000,” the NFU estimates.

“Even at a £2m (exemption) threshold, annual tax payments of £33,000 would equal farm profits.”

Delinked payments

The burden this places on farmers will undermine investment and innovation in the sector, the NFU warns, especially at a time when delinked payments to farmers in England are due to be chopped to just £7,200 per farm business next year.

Inflationary pressures from the rise in the national minimum wage and increases in employers’ National Insurance contributions are also likely to push up both labour and other farm input costs, further squeezing margins.

It has been rumoured that Defra and the Treasury might be reconsidering some elements of the Budget package, such as by introducing a new age threshold of 80, above which farmers might be exempted from IHT, or raising the £1m allowance.

The official word from 10 Downing Street is that the government remains “committed to implementing the policy as set out in the Budget”.

“We are not considering any mitigations,” a spokesman told The Guardian newspaper. “The economic situation the government inherited has required us to make tough choices.”

NFU president Tom Bradshaw is far from impressed. “All I want to do is sit down with the chancellor and discuss a way forward but, so far, she has refused.

“Rest assured, the NFU will continue to push hard to stop the family farm tax. It’s cruel, it’s wrong, and it risks decimating our sector,” he says.