Ministers should give farmers an inheritance tax holiday for the next few years, the Institute for Fiscal Studies (IFS) has said as it warned that government changes to agricultural taxes risked treating some landowners unfairly.
Rachel Reeves, the chancellor, announced in her budget last month that farmers with a business worth more than £1m could be subjected to 20% inheritance tax, prompting a tractor protest outside parliament.
The government had previously promised no changes would be made to agricultural property relief, which granted farmers an exemption from inheritance tax.
A new analysis by the IFS economic thinktank concluded that it was largely fair to treat agricultural assets such as land the same as other assets that were subjected to inheritance tax.
But it said mitigations could be required to protect food security and prevent elderly farmers being caught out by the change.
David Sturrock, a senior research economist at the IFS, said: “Current farm owners passing away in the next seven years (but after the new regime comes into force in April 2026) will not have had the opportunity to avoid inheritance tax by making lifetime gifts.
“If the government wished to give current farm owners the same opportunity to avoid inheritance tax as owners of other assets, it could, for example, make lifetime gifts of agricultural property made before a certain future date inheritance tax free, regardless of the timing of the death.”
The Guardian revealed last week that Treasury officials were assessing mitigations to the policy including amending gifting rules for over-80s so they could pass on their farm to their family without having to live for seven years after making the gift.
Keir Starmer and the environment secretary, Steve Reed, had previously referred to comments made by the IFS’s director, Paul Johnson, to defend not making changes to the policy. Reeves is understood to be holding firm and does not want to consider any changes.
Labour has tried to target the policy at wealthy investors buying land to avoid inheritance tax, who have been blamed for driving up land prices.
However, many farmers complain that while they may be asset rich, they are cash poor because farm incomes have plummeted owing to cost inflation, poor harvests and fierce competition among retailers. They say many farmers take home less than the minimum wage.
Another tax expert, Dan Neidle, has produced research that finds the tax hits working farmers harder than tax avoiders. He has suggested equalising the inheritance tax to 40% but making it payable only when the land is sold, avoiding any impact on those who want to pass the family farm down to relatives.
Neidle suggested “a clawback of all inheritance tax relief for a farm if those inheriting farmland sell it within a certain time. In other words, upon a sale, all the [inheritance tax] that was previously exempt suddenly reappears and becomes charged.”
He also proposed the Treasury should raise the inheritance tax cap to about £20m so only the “largest and most sophisticated farm businesses become subject to [it]”.
Tim Farron, the Liberal Democrat environment spokesperson, said: “The government hid behind the IFS to try and justify this disastrous policy. That very same organisation is now telling them that their own proposals need an overhaul.”
A Treasury spokesperson said: “As the IFS has said the existing rules for these reliefs are unfair and inefficient. We remain committed to fully implementing the policy and are not considering mitigations.”
