How does inheritance tax affect farms?
- 1Since 6 April 2026, Agricultural Relief and Business Relief have been capped at £2.5 million combined for 100% relief — above that allowance, 50% relief applies (an effective 20% IHT rate)
- 2Deaths before 6 April 2026 use the earlier unlimited rules, so all qualifying agricultural and business property could receive 100% relief with no cap
- 3The £2.5 million allowance is transferable between spouses and civil partners, so a surviving spouse's estate may have up to £5 million at 100% relief if a claim is made
- 4Shares trading on markets designated as 'not listed', such as AIM, now attract 50% relief in all circumstances and do not use up the £2.5 million allowance
- 5IHT due on agricultural and business property can be paid in 10 equal annual interest-free instalments to prevent forced farm sales
- 6Land let on tenancies starting before September 1995 (Agricultural Holdings Act) qualifies for only 50% APR; land let after September 1995 (Farm Business Tenancies) qualifies for 100% APR
Since 6 April 2026, Agricultural Relief and Business Relief have been capped at £2.5 million combined for 100% IHT relief. Above £2.5m, 50% relief applies (a 20% effective tax rate). Deaths before 6 April 2026 use the earlier unlimited 100% relief rules.
Major Change: April 2026
These changes were announced at the Autumn Budget in October 2024, when the allowance was to be £1 million. The government raised it to £2.5 million on 23 December 2025, and it took effect on 6 April 2026 under Finance Act 2026. Only the first £2.5 million of qualifying agricultural and business property now receives 100% relief from inheritance tax. HMRC estimates around 185 estates a year pay more inheritance tax as a result, and that roughly 85% of estates claiming agricultural relief pay no additional inheritance tax.
Quick Summary
- Deaths before 6 April 2026: Qualifying agricultural and business property could receive 100% relief from IHT with no upper limit
- Deaths on or after 6 April 2026: 100% relief capped at £2.5 million combined; 50% relief above (effective 20% IHT rate)
- Spousal transfer: Unused allowance can be transferred to a surviving spouse or civil partner, if a claim is made
- Index-linking: The allowance is due to rise with CPI from 6 April 2031
- Payment options: IHT on APR/BPR assets can be paid over 10 interest-free annual instalments
What Is Agricultural Property Relief?
Agricultural Property Relief (APR) reduces or eliminates inheritance tax on agricultural property when someone dies. It applies to:
- Farmland and farm buildings
- Farmhouses (where the occupier works the land)
- Farm cottages occupied by farm workers
- Land managed under an environmental agreement with a UK public body or an approved responsible body (extended from 6 April 2025)
Qualifying Conditions
To qualify for APR, the property must:
- Be part of a working farm (not just land that happens to be agricultural)
- Have been owned by the deceased for at least 2 years before death (if occupied by them) or 7 years (if let to a tenant)
- Be located in the UK. Agricultural relief stopped applying to property in the Channel Islands, the Isle of Man and the European Economic Area on 6 April 2024
What Is Business Property Relief?
Business Property Relief (BPR) reduces inheritance tax on business assets. For farms, BPR often applies alongside APR to cover:
- Farm machinery and equipment
- Livestock
- Crops and produce
- Trading businesses operated from the farm (e.g., farm shops, diversified activities)
The April 2026 Changes Explained
The £2.5 Million Allowance
For deaths on or after 6 April 2026:
- First £2.5 million: 100% relief (no IHT payable)
- Above £2.5 million: 50% relief (effective 20% IHT rate)
- Combined allowance: The £2.5m limit covers agricultural and business property together, not one each
- Lifetime gifts: The new rules also apply to gifts made on or after 30 October 2024 where the donor dies on or after 6 April 2026 and within seven years of the gift
Example Calculation
Farm estate value: £4 million qualifying for agricultural or business relief
| Component | Deaths before 6 April 2026 | Deaths from 6 April 2026 |
|---|
| First £2.5 million | 100% relief = £0 IHT | 100% relief = £0 IHT |
| Remaining £1.5 million | 100% relief = £0 IHT | 50% relief = £750k taxable |
| IHT at 40% on taxable amount | £0 | £300,000 |
Nil-Rate Bands Still Apply
The standard nil-rate band (£325,000) and residence nil-rate band (£175,000 if passing the home to descendants) still apply on top of the agricultural and business relief allowance. A married farming couple who can use both £2.5 million allowances and both nil-rate bands could have a substantial part of the estate free from IHT, though the residence nil-rate band is tapered away entirely on estates above £2.35 million.
Who Will Be Affected?
Government Estimates
When the allowance was raised to £2.5 million in December 2025, the government put the number of estates paying more inheritance tax as a result of the reform at around 185 a year, down from the 375 estimated under the original £1 million allowance. It also said roughly 85% of estates claiming agricultural relief would pay no additional inheritance tax. No official figure is published for the proportion of working family farms affected, as distinct from all estates claiming the relief.
Spousal Transfer and Index-Linking
Spousal Transfer of Allowance
Unused allowance is transferable between spouses and civil partners. This was not part of the original October 2024 announcement, which said the allowance would not be transferable; it was added at the Budget in November 2025. It means:
- If the first spouse to die does not use their full £2.5m allowance, the unused portion can be transferred to the surviving spouse's estate. Where the first death was before 6 April 2026, the whole £2.5m allowance is treated as available to transfer
- A surviving spouse's estate could have up to £5 million of agricultural and business property at 100% relief
- As with the nil-rate band, the transfer is not automatic — a claim must be made (HMRC form IHT437)
Index-Linking from 2031
The allowance is due to be increased in line with CPI inflation from 6 April 2031.
10-Year Interest-Free Instalments
IHT on agricultural and business property can be paid in 10 equal annual instalments, interest-free. This is designed to prevent forced sales of farms to pay the tax bill.
For Bereaved Families: What You Need to Know
Deaths Before April 2026
If your loved one died before 6 April 2026, the current rules apply:
Deaths From April 2026 Onwards
For deaths occurring on or after 6 April 2026, executors should:
- Valuations: The £2.5m allowance makes precise values matter when valuing the estate for probate
- Check spousal transfer: If the first spouse died after April 2026, check if unused allowance transfers
- Consider instalment option: If IHT is due, the 10-year interest-free payment plan may help avoid immediate cash flow problems
- Anti-forestalling: Gifts made on or after 30 October 2024 fall under the new rules if the donor dies on or after 6 April 2026 and within seven years of the gift
Common Questions
Does the Farmhouse Qualify?
Farmhouses can qualify for APR, but only if the occupier is actively farming the land. HMRC applies the "character appropriate" test - the farmhouse must be appropriate to the farming operation in size and nature. Large or modernised farmhouses are frequently challenged.
What About Let Land?
Agricultural land let to tenant farmers can qualify for APR at either 100% or 50% depending on the tenancy type:
- 100% relief: Land let on tenancies starting after 1 September 1995
- 50% relief: Land let on older tenancies with security of tenure
Can We Avoid the New Rules?
Some families are considering gifting farmland during their lifetime. However:
- Gifts must be made at least 7 years before death to escape IHT entirely
- The giver must not continue to benefit from the gifted property ("gift with reservation" rules)
- Capital Gains Tax may be triggered on lifetime transfers
- Gifts of agricultural or business property made on or after 30 October 2024 are caught by the new rules if the donor dies on or after 6 April 2026 within seven years of the gift
Key Takeaways
- Since 6 April 2026, agricultural and business relief have been capped at £2.5 million for 100% relief
- Above £2.5 million, 50% relief applies (effective 20% IHT rate)
- The £2.5m allowance is transferable between spouses if a claim is made
- IHT can be paid over 10 interest-free annual instalments
- Deaths before April 2026 benefit from current unlimited relief
- Shares on markets designated as "not listed", such as AIM, attract 50% relief in all circumstances
- HMRC estimates around 185 estates a year pay more inheritance tax because of the reform