How to Avoid Inheritance Tax on Farms

Farms are often passed down through generations, making them more than just a business – they are a legacy. But when a farmer passes away, Inheritance Tax (IHT) can pose a major threat to keeping the land and property in the family. Without careful planning, the value of the farm could trigger a tax bill of 40 percent on anything above the standard threshold.

This guide explains how Inheritance Tax applies to farms, the reliefs available, and the steps farming families can take to reduce or eliminate the tax burden.

When Does Inheritance Tax Apply to Farms?

Inheritance Tax is payable when someone dies and their estate is worth more than the nil-rate band, which for the 2024–2025 tax year is £325,000. Anything above this is taxed at 40 percent unless exemptions or reliefs apply.

For those passing on a home to direct descendants, the residence nil-rate band (RNRB) can increase the tax-free threshold by £175,000, potentially giving married couples a combined exemption of £1 million.

Farms, however, often far exceed these values due to the land, buildings and business assets involved. That’s why tax planning is essential.

Agricultural Relief for Inheritance Tax

The main way to avoid or reduce IHT on farms is through Agricultural Property Relief (APR). APR allows some or all of the agricultural value of land, buildings and farmhouses to be passed on free of Inheritance Tax.

To qualify for APR, the property must be classed as agricultural and either:

• Owned and occupied for agricultural purposes for at least two years

• Let out but owned for at least seven years and used for agriculture

APR is available at either 100 percent or 50 percent, depending on ownership, occupation and the nature of any tenancies.

What Qualifies as Agricultural Property?

Agricultural property includes:

• Farmland

• Farmhouses and farm cottages

• Buildings used for growing crops or housing livestock

• Woodland used in conjunction with farming

• Some shares and securities related to agricultural businesses

It does not apply to non-agricultural elements, such as:

• Diversified businesses on the land (e.g. caravan parks, shops, solar panels)

• Surplus land not used for farming

• Property with development potential

Those parts may still qualify for Business Property Relief (BPR) instead.

Rates of Agricultural Relief

• 100 percent APR is granted where the landowner is actively farming or where the land is let under an eligible tenancy.

• 50 percent APR applies when someone has the right to vacant possession but doesn’t farm it themselves.

Farmhouses may also qualify for relief if they are of a size and character appropriate to the farm and used by the farmer.

Using Trusts to Reduce Inheritance Tax

Placing agricultural land or property into a trust can help reduce or defer IHT liability. This is especially useful for parents wanting to hand over control of the farm to their children while protecting it from potential tax bills or divorce settlements.

However, trusts are complex and can trigger their own tax charges if not structured correctly, including entry and exit charges or ten-year charges. Professional advice is strongly recommended when considering this route.

Replacement Agricultural Property

If you’ve recently sold or replaced agricultural property, it may still qualify for APR, provided it meets certain conditions and continues to be used for agriculture. This helps ensure relief isn’t lost simply because land is sold and replaced in the years leading up to death.

What About Business Property Relief (BPR)?

Parts of a farm that don’t qualify for APR, such as diversified income streams or agricultural businesses structured as companies, may qualify for Business Property Relief.

BPR can offer up to 100 percent relief on:

• Farming businesses

• Shares in farming partnerships

• Agricultural assets used in the trade of a qualifying business

APR and BPR can sometimes be used together, depending on how the assets are structured.

What About Farmhouses and Cottages?

Farmhouses must be of a size and nature suitable for the land they support. APR is only available if the person living there is actively involved in the day-to-day running of the farm.

Let cottages may also qualify if they are occupied by agricultural workers and form part of the working farm.

Changes to IHT for Farming Families

As of 2024–2025, there are no major changes in IHT legislation specifically targeting farming families, but HMRC scrutiny around APR and BPR eligibility has increased. Claims must be properly documented, and it's essential to keep evidence of how land is used and by whom.

Any future changes in tax policy could affect eligibility, so regular reviews of your estate and succession planning are advisable.

Five Key Steps to Avoid IHT on Farms

1. Ensure land and buildings meet the definition of agricultural property

2. Occupy or use the land for qualifying agricultural purposes

3. Keep thorough records and professional valuations

4. Review the structure of the farm business and consider combining APR and BPR

5. Seek legal advice on using trusts or lifetime gifting to protect your estate

Final Thoughts

Inheritance Tax doesn’t have to force the sale of the family farm. With careful planning, many agricultural estates can pass down with little or no tax due. Agricultural Property Relief and Business Property Relief are powerful tools for farming families, but they come with strict rules and documentation requirements.

If you’re concerned about IHT on your farm, speak to a solicitor or tax adviser experienced in rural estate planning. With the right structure and evidence in place, you can pass the farm to the next generation as intended.