IHT reform largely protects family farms but could be better targeted, finds new CenTax study

IHT reform largely protects family farms but could be better targeted, finds new CenTax study

The first evidence-based assessment of how the Government’s Inheritance Tax (IHT) reform would affect farm estates has been published by the Centre for the Analysis of Taxation (CenTax), led by Professor Arun Advani of Warwick Economics and Dr Andy Summers of the LSE.

CenTax analysis finds that there is scope for better targeting the reforms to extend protection for family farms and other small businesses whilst further reducing the use of agricultural and business property as a tax shelter.

A farm estate, which is the focus of the analysis, is defined as the total net wealth of an individual who has died owning some farmland or other farm assets on which they had claimed tax relief.

Using detailed HMRC inheritance tax data, The Impact of Changes to Inheritance Tax on Farm EstatesLink opens in a new window finds that, as currently designed, the planned reforms do protect family farms to a large extent - just under one third of farm estates would be impacted by the reform; and that of that 30 per cent, around 200 estates per year potentially comprise family farms valued at less than £5 million - but there is scope for better targeting the reforms to extend protection for farms and other small businesses whilst further reducing the use of agricultural and business property as a tax shelter.

The report proposes two options for better targeting the reform whilst still raising at least as much revenue overall:

• A ‘minimum share rule’ that would remove relief for passive investors in farmland and other business assets, reducing the use of these assets as a tax shelter. Restricting relief to estates whose relief claims cover at least 60% of the total estate could fund an increase in the combined allowance for 100% relief to £5 million per estate, whilst still raising at least as much revenue as planned reform overall.
• An ‘upper limit on relief’ that would cap relief at the first £10 million of claim, funding an increase in the allowance for 100% relief to £2 million per estate. The effect would be to extend protection for family farms and other small businesses.

Addressing concerns that family farms would need to be sold to pay the tax, the report finds that:-

• Almost half (49%) of all impacted farm estates would see a tax increase of less than 5 percentage points.
• All of the 25 farm estates per year facing an increase larger than 15pp are valued at over £7.5 million.
• 86% of impacted farm estates could pay their entire IHT bill out of non-farm assets, leaving around 70 farm estates per year that could not.

Dr Andy Summers, Director of the Centre for Analysis of Taxation (CenTax) and Associate Professor at London School of Economics & Political Science (LSE) said:

“Our analysis shows that the Government’s reform largely protects family farms whilst limiting claims by the wealthiest estates. But the relief could be better targeted to reduce its use for tax planning and further extend protection for businesses, including farms.”

• PHOTO - His Majesty's Treasury, Whitehall
  
  
• Read the report in full on the CenTax website: The Impact of Changes to Inheritance Tax on Farm Estates (2025)Link opens in a new window Arun Advani, Sebastian Gazmuri-Barker, Sanaya Mahajan, and Andy Summers
  
  
• The Centre for the Analysis of Taxation (CenTax) is an independent research centre dedicated to improving public understanding of tax policy and helping to design a better tax system. This research was funded by the Nuffield Foundation and abrdn Financial Fairness Trust.