The government's planned inheritance tax changes could leave small family farms paying tax bills that wipe out their annual profits, according to new modelling.
Despite assurances that small farms won’t be affected, inheritance tax (IHT) changes could 'prove a death sentence' for many businesses in the industry.
This is according to the Country Land and Business Association's (CLA) new analysis of model arable farms, published today (12 November).
It shows that a typical 200-acre farm owned by an individual with an expected annual profit of £27,300 would face an IHT liability of £435,000.
If spread over a period of ten years, this would require the farm to allocate 159% of its profit each year to cover the tax bill. To meet this bill, successors could be compelled to sell 20% of their land.
Similarly, a 250-acre arable farm owned between a couple in the way the chancellor expects to be possible with an expected annual profit of £34,130 would face an IHT liability of £267,000, amounting to 78% of its profit each year over a decade.
From April 2026, agricultural property relief (APR) and business property relief (BPR) will be capped at £1m in total, per owner.
Qualifying assets beyond this level will receive 50% relief from inheritance tax, resulting in an effective tax rate of 20%, after using the nil rate band of £325,000 and residence nil rate band of £175,000.
If a farmer is married, his or her spouse would be able to benefit from their relief when passing their business assets to the successor, but even farms owned by two people will be severely affected, the CLA's analysis shows.
The model highlights that family-run farms – typically asset-rich but cash-poor – would be forced at best into a cycle of stagnation, asset sales, or debt to cover this tax burden.
Following the publication of the analysis, the rural body has urged the government to reconsider the inheritance tax changes, as it risked undermining the future of family farming across the country.
Gavin Lane, deputy president of the CLA, that while the government framed it as a tax on the wealthy, the reality was that family farms would be hit just as hard.
He said: “Either the government isn’t being honest with the public about the true impact of these reforms, or they don’t understand the nature of rural businesses.
"I'd like to believe it is the latter and that they are prepared to listen to our input rather than continually trying to dismiss it.
"Asking farms to use their income to pay a huge capital tax bill over ten years, if indeed it is possible, will threaten the future of investment and the viability of the business.”
It comes ahead of Defra Secretary Steve Reed appearing at the CLA’s annual Rural Business Conference on 21 November.
He is expected to address farmers and rural business owners for the first time since the budget announcement.
