Agricultural Property Relief changes – the ‘Tractor Tax’ explained

One of the most controversial changes in the Autumn 2024 Budget was to Agricultural Property Relief. Soon dubbed the ‘Tractor Tax’ by media, it has hit a raw nerve among those with smaller farms. Indeed, at the time of writing, 10,000 farmers were planning to march in London against the changes. Some were also planning to withhold meat and crops from supermarkets as part of a ‘national strike’.

According to the BBC, The Treasury has also rejected a DEFRA bid to soften the impact for some farms. Indeed, the Treasury has said there will be no mitigations to the policy.

Given the strong feelings about the so-called ‘Tractor Tax’, we take a closer look at the proposed changes to Agricultural Property Relief – and what it might mean for you.

What is Agricultural Property Relief?

Agricultural Property Relief is a form of inheritance tax (IHT) relief. In essence, it reduces the amount of IHT that’s payable when farmland is passed from one generation to another.

Currently, Agricultural Property Relief allows a farmer to pass on a working farm to their heirs completely free of inheritance tax or at a 50% relief (depending on certain conditions).

There is also something called Business Property Relief, which applies to business assets that are part of an estate. Again, this relief can be either 100% or 50% depending on circumstances.

What are the changes to Agricultural Property Relief?

In the Autumn 2024 Budget, chancellor Rachel Reeves announced changes to Agricultural Property Relief. They will come into force from 6th April 2025.

The main change is that IHT relief will be confined to the first £1 million of combined agricultural and business property.

Above this, landowners will pay IHT at 20%. The normal, unrelieved rate is 40%.

Government points out IHT bills can be paid interest free over a period of 10 years.

How much will the tractor tax cost farmers?

The amount farmers will pay will depend on their circumstances and the value of their estate.

The Treasury says that a couple who jointly own a farm will be able to pass on land and property tax-free up to a value of £3 million. Each spouse or civil partner has a £1m tax-free allowance for land and property. On top, each person has the normal £325,000 IHT allowance, plus the £175,000 residence nil-rate band for their main residence. When one person dies, they inherit their partner’s allowances, allowing £3 million to go tax-free to direct descendants.

However, if they pass the estate on to non-direct descendants, they can’t access the residence nil-rate band. This gives the maximum tax-free estate a value of £2.65 million.

However, if the farm is owned by one person only, they can only access £1 million tax-free relief for the agricultural land and property component (i.e. they can’t ‘double up’). Families in this position are more likely to end up paying IHT.

Why is government making the changes?

Government says it’s making the changes to Agricultural Property Relief and Business Property Relief because very large estates benefit disproportionately. It points out that 2% of claims account for 22% of Agricultural Property Relief, costing the taxpayer £119 million.

What does the farming industry think?

The farming industry is deeply unhappy about the changes. This sentiment is aggravated by the fact that in December 2023, the then shadow DEFRA secretary said the Labour Party had no plans to change Agricultural Property Relief. The National Farmers Union (NFU) says the new changes “could force farmers to sell their family farms to pay the Inheritance Tax bill. This could happen even if they have worked on the farm for many years.”

What can I do about the ‘Tractor Tax’?

If you’re worried about the changes to Agricultural Property Relief, it’s important to get good advice from a tax specialist. If you’d like to talk to one of our tax planning experts, please get in touch today.