Thousands of farmers descended on London this week, demanding that the government change its plans to introduce inheritance tax on some of their assets. 

FactCheck takes a look.

What is the government’s new inheritance tax policy for farms?

As it stands, farms are almost entirely exempt from inheritance tax – thanks to two policies called Agricultural Property Relief (APR) and Business Property Relief (BPR).

Farm owners have been able to use a combination of these reliefs to pass on their farmland and associated business assets, tax free. 

But under new plans announced in the Budget, these reliefs will together be capped at one million pounds – so farm land and farm assets over that value will be subject to inheritance tax at 20 per cent.

So what would this look like in practice?

Let’s say you own a farm worth £2.2 million – that’s about the average net worth of a farm in England, according to figures from Defra.

If you’re single, the Treasury states you’ll be able to pass on up to £1.5 million of this to children or grandchildren tax free. That’s the one million pound allowance for farm owners, plus the normal tax exemptions that everyone has, which are worth up to £500,000.

£2.2 million minus the £1.5 million in tax exemptions leaves £700,000 that could be taxed. 

Under the new government policy, that £700,000 would be taxed at 20 per cent – rather than 40 per cent as non-farmers pay. 

This leaves a theoretical tax bill of £140,000. Your child or children can pay this off in instalments over ten years, interest free. That’s more favourable than inheritance tax bills non-farmers pay, which face a 7 per cent interest rate.

So that’s an annual tax bill of £14,000 for ten years, in our hypothetical example.

Now imagine that you’re part of a married couple and are passing on a farm of the same value – £2.2m. 

The Treasury states “two people who jointly own a farm will be able to pass on land and property valued up to £3 million to a child or grandchild tax free”. This is because you and your spouse could each pass on a £1.5m tax exemption. (Spouses don’t need to die at the same time for their heirs to benefit from the combined £3m exemption.)

That means, in this example of a couple passing on a £2.2m farm, your children should pay no inheritance tax at all.

How many farms will actually end up paying inheritance tax?

Here’s where it gets complicated – but we’ll try to keep it simple.

The Treasury says that about a quarter of farms will be affected by the changes – about 500 in a single year. (For context there are around 200,000 farms in the UK.)

The Treasury estimate comes from real-world data on how many farms claimed Agricultural Property Relief (APR) on inheritance tax in previous years, and how many of those would now be over the threshold to pay tax. 

Farmer groups have said this could be an underestimate as it doesn’t take account of diversified farms – those are farm estates which also run other kinds of businesses like B&Bs alongside their farming activity.

These farm estates also use Business Property Relief (BPR) to reduce their tax burden, which is now also subject to the million pound cap – and farming groups say when the value of business assets are added in, this would bring more people over the threshold to pay.

But, in response to this, the Chancellor released further data. Figures from the year ending 2022 show that fewer than a quarter of claims for APR and BPR combined were worth over £1.5 million – the amount that even a single person should be able to pass on tax free.

So it looks like even when business reliefs are taken into account, we should still see only around a quarter of farms being liable for any tax under the new rules.

The Country Land and Business Association has publicised a slightly different figure. Its headline is that 70,000 farms will be affected by the changes – this equates to around a third of all farms. (So, only slightly larger than the quarter of farms estimated by the Treasury.)

The reason the figures sound so different is that the Treasury looks at how many will be affected in a single year – while the CLA estimates how many farms in the country could ever be affected.

How many farms will get an inheritance tax bill they can’t afford to pay?

Farmer groups have said that a large number of high net worth farms – so those with a lot of acres and assets, which are therefore likely to be on the hook for inheritance tax – have such low profits that they wouldn’t be able to pay the tax.

Is this true? Unfortunately, we don’t have a clear answer until we get more data.

It’s important to note that many farms in England and Wales do have tight margins and many are loss making – farmer groups are correct about this.

Defra data shows that last year, 30 per cent of farms made a loss, while a further 25 per cent made less than £25,000. 

If your profits look like this, and you’re a single person passing on a £2.2 million farm – as in our example above – then you could be in trouble when it comes to paying off a £14,000 annual tax bill.

But the key issue is that we don’t know how many farms are worth enough to potentially be taxed, while also making very low or no profits. 

This could be a vanishingly small number of estates, or, as farmer groups have claimed, it could be a significant minority. The options for farms like this are to take on debt, or sell part of their land to pay the tax – but farmer groups say both of these options would only make it harder for such farms to turn a profit.

(Image credit: Tayfun Salci/ZUMA Press Wire/Shutterstock.)