Inheritance Tax Update for Farmers

December 2025 changes and succession planning

Inheritance Tax (IHT) has always been a significant concern for farming families and none more so than over the last year and a half. The major changes that were originally announced in the Autumn 2024 Budget came into effect from 6 April 2026.

A key change to the original rules was announced in December 2025 giving an increase in the combined allowance for qualifying agricultural and business property from £1 million to £2.5 million. This now means that from 6 April 2026:

• Relief will remain at 100% on combined agricultural and business property up to a value of £2.5 million.

• After £2.5 million, the rate of relief will be reduced to 50%, creating a rate of tax of 20% instead of the standard 40%.

Farms are typically asset-rich businesses, with land, buildings and machinery often representing substantial value, but they may have limited liquid funds available to pay a tax bill. As a result, reliefs such as Agricultural Property Relief (APR) and Business Property Relief (BPR) have played a vital role in allowing farms to pass between generations without forcing the sale of land or assets.

The December 2025 changes were welcome news for many farming businesses and continue to highlight the importance of ensuring succession plans remain up to date.

The December 2025 change

The higher threshold of £2.5 million reflects the reality that farmland values are such that the £1 million limit was not sufficient to cover the land prices and the overall value of the farming business for any reasonably commercial farm.

Under the revised rules, up to £2.5 million of qualifying agricultural and business assets can be passed on without incurring inheritance tax, provided the assets meet the requirements for APR or BPR. As this allowance is transferrable between spouses this means that £5 million is available for a married couple.

For many family farms, this increased allowance provides additional protection. However, it is important to remember that a large number of farms exceed this value, particularly where land values are high or where the business has diversified.

Why succession planning is still essential

Even with the increased allowance, inheritance tax planning remains a key consideration for farming families.

Without proper planning, a farm that has been built up over generations could face a significant tax liability when it passes to the next generation. Succession planning is not only about reducing tax, but also about ensuring the long-term continuity of the farming business and avoiding potential disputes within the family.

Starting these conversations early can help ensure that the transition of both ownership and management happens smoothly.

Practical steps for farmers

There are several steps farming families can take to strengthen their succession planning and make the most of the available tax reliefs.

Review your business structure

Many farms operate as partnerships or family businesses without formal documentation. A clear partnership agreement or company structure can help define ownership, clarify responsibilities and support effective succession planning.

Ensure wills are up to date

Wills should reflect the current structure of the farming business and clearly set out how assets are intended to pass to the next generation. Outdated wills can lead to complications and unintended tax consequences.

Consider lifetime gifting

In some cases, transferring assets during a farmer’s lifetime can reduce the overall inheritance tax exposure. Gifts made more than seven years before death may fall outside the estate for IHT purposes, although professional advice is essential before taking this step as there will be Capital Gains Tax implications of making a gift.

Document agricultural use of land and buildings

To qualify for Agricultural Property Relief, land and buildings must be actively used for agricultural purposes. Keeping clear records of farming activities can help demonstrate eligibility if claims are reviewed.

Plan diversification carefully

Many farms now generate income from diversified activities such as holiday accommodation, farm shops, renewable energy or events. While diversification can strengthen the business financially, it may affect eligibility for certain tax reliefs if not structured correctly.

Taking advice early

Inheritance tax rules surrounding farming businesses can be complex, particularly where land ownership, partnerships and diversified activities are involved.

The increase in the allowance to £2.5 million is a positive step for the farming sector, but it does not remove the need for careful planning. Reviewing your business structure, succession plans and estate arrangements regularly can help ensure that your farm remains protected for the future.

If you would like to discuss how the recent changes may affect your farming business, seeking professional advice early can help you plan effectively and provide peace of mind for the next generation.