New NFU analysis diminishes Treasury estimates of IHT impact

The NFU has published a fresh analysis which, it says, proves the Treasury’s claims that only about a quarter of farm businesses will ever be caught by the planned 20% inheritance tax (IHT) provisions are unfounded.

Working with former Treasury and Office for Budget Responsibility economists, the NFU says the government’s claim that just 27% will be affected, after allowing for zero IHT on the first £1m of agricultural assets, “materially underestimates the true proportion”.

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

See also: Defra has conducted no impact assessment of family farm tax

The analysis also finds that the majority of medium-sized working farms that will be hit by IHT from April 2026 will not be protected by having a 10-year window to pay back any future dues.

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

Three reasons

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

1. First, not all the agricultural property relief (APR) claims it points to relate to working farms. Just by removing non-commercial farms and smaller blocks of bare land that are simply rented from the Treasury’s estimates, the proportion of commercial farms liable to IHT increases “significantly”.
2. 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 kicks in. “Land prices have grown rapidly since 2021, bringing more farms in scope of the measure,” it says.
3. Third, using 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, says the union. “Factoring in the additional impact from the changes to BPR lifts the proportion of affected working farms to 75%,” it says.

Other allowances

The union also dismisses the claims of 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,” says the NFU.

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 English farms.

Cereal farms are seen as exceptionally 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 threshold, the annual tax payments of £33,000 would equal farm profits.”

Burden 

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 set to be slashed to just £7,200 next year.

Inflationary pressures from the rise in the 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.

But the official line from government is that it “remains committed to fully implementing the policy and are not considering mitigations”.