In a move that has sent shockwaves through the agricultural community, Labour’s Chancellor, Rachel Reeves, has unveiled a significant change to inheritance tax (IHT) rules that could affect thousands of farmers across the UK. Farmers, who had been assured that their ability to pass on agricultural land without facing hefty tax bills would remain intact, are now faced with a looming new tax regime that threatens to undermine this promise.

Starting in April 2026, agricultural property relief (APR) will be capped at £1 million, with assets exceeding this threshold subject to inheritance tax, albeit at a reduced 50% relief. For many farmers who own estates valued above £1 million, this change means they will face an effective inheritance tax rate of 20% on the value of their assets over the £1 million cap.

How Does Agricultural Property Relief (APR) Work?

Currently, agricultural property relief allows you to pass on agricultural land and certain related assets free from inheritance tax, either during your lifetime or through your will. This relief includes:

1. Land or pasture used for growing crops or rearing animals

2. Farm buildings, including farm cottages and farmhouses

3. The value of milk quotas linked to the land

4. Some agricultural shares and securities

However, not everything qualifies for APR. The following items are excluded from the relief:

1. Farm equipment and machinery

2. Derelict buildings

3. Harvested crops

4. Livestock

5. Property that is subject to a binding sale contract

From April 2026, the agricultural property relief will be capped at £1 million. This means that any agricultural property valued above this threshold will no longer be fully exempt from inheritance tax, with only 50% of the value above the £1 million cap qualifying for the relief.

The Chancellor claims this change will only impact a small minority of farms, with smaller family farms being largely unaffected. However, the National Farmers’ Union (NFU) has raised concerns, suggesting the Treasury’s estimates may be overly optimistic and that the new rules could affect as many as half of all working farms in the UK.

With these upcoming changes it’s now increasingly important that farmers take a proactive approach in reviewing their estates and consider their options well in advance of any succession planning.