Agricultural and Business Property IHT Exempt up to £3m?

Are farmers really getting £3m inhertance tax free?  We explain ...

Understanding Nil Rate Band Allowances

• We each have an Inheritance Tax Nil Rate Band (NRB) of £325,000.
• If you own a private residence that gets passed to (or the sale proceeds) if passed to direct line descendants i.e., your children (including a stepchildren, adopted children or foster children), together with that child's own lineal descendants i.e.  your grandchildren (again your step-grandchildren, adopted grandchildren and foster grandchildren and so on down the blood line), your also have a private residence nil rate band (RNRB) of £175,000.

Unused NRB and RNRB

• If you leave some or all your wealth including interests in your private residence to your legal spouse or civil partner, you do not use some or any of your IHT allowances.
• Any unused nil band allowances are transferred on death to your legally married spouse/civil meaning the survivor will have their own allowances up to £500,000 plus the unused allowance up to £500,000 from 1^st death.  A total potential NRB on 2^nd death of £1m.

Agricultural and Business Property Relief (ABPR)

There has been uproar this week with 10,000 farmers protesting at Westminster about changes to Agricultural and Business Property Relief (ABPR) starting in April 2026.  Not so much from business owners though.  Farmers and agricultural landowners will be restricted to the 1^st £1m of agricultural property assets being passed on with 100% relief against inheritance taxes.  Any balance about this will now be taxed at 50% of the normal IHT rate of 40% i.e., 20%.

The new Labour government looks like it will not back down and claims that up to £3m can therefore be passed on before IHT at 20% applies.  The government claims that only around 500 estates each year will be affected.

Labour’s Argument

• Legal married couples and civil partners each have £500,000 in NRB and RNRB.
• Add to this £1m Agricultural Property Relief at 0.%.
• Total Tax-Free Allowance per person on death £1.5m, meaning a couple can gift up to £3m between them on death tax free.
• This means you must be legally married or in a civil partnership and each own your own share of the agricultural property.

Our Counter Argument

• What if you are single/divorced?
• You will only have £500,000 NRB/RNRB and £1m ABPR.  That’s £1.5m not £3m tax free.
• What if you are already widowed i.e.  your partner is already dead and left all agricultural assets to the survivor assuming full agricultural property relief would be available?
• Unused ABPR cannot be transferred to surviving partners meaning it is lost.
• You may have up to £1m NRB/RNRB (£500,000 X 2) and just £1m ABPR.  That’s £2m not £3m tax free.
• What if the farming couple are childless and want to leave assets to nieces/nephews/other family?
• That’s all £350,000 RNRB gone (2 X £175,000) as it only works if you passed the private residence (farmhouse) down to bloodline relative children, grandchildren etc..
• What if you are a ‘tenant’ farmer and do not own the ‘farmhouse’ but have all the agricultural equipment?  What if the farm does not have a farmhouse?
• That’s up to £350,000 RNRB gone (2 X £175,000).
• What if the farm and land is owned under ‘joint tenants’ and not ‘tenants in common’?
• The farm and land will automatically pass to the surviving partner (as they already own the whole lot) meaning no £1m ABPR has been used on 1^st death and can only be used on 2^nd death.
• Again, the survivor may have up to £1m NRB/RNRB (£500,000 X 2) and just £1m ABPR.  That’s £2m not £3m tax free.

More farmers we suspect may be forced to sell land, equipment, or livestock to pay inheritance tax bills than Labour suggests.

The Only Way Labour’s £3m Argument Works

• Joint owning married/civil partner couples must have bloodline children and must sever joint tenancy on all assets.
• On 1^st death, the deceased must leave their £1.5m share of assets tax free to children/bloodline.
• But this means the surviving spouse will lose access to the deceased partner’s share of the income/wealth generated from all the agricultural property as the children/bloodline are now entitled to it. 
• Your surviving spouse’s ‘pension’ from the ‘farm’ is zero.
• On 2^nd death, the deceased spouse then leaves their share up to £1.5m tax free to children/bloodline.  That’s £3m now gifted with no taxes.

We accept that we must all pay more taxes to shore up the NHS, increase military spend, find a solution to social care and much more but we suspect many more farmers than Labour forecast (as well as other business owners) will close/not be able to pass on their legacy to the next generation.  Some business succession will fail meaning redundancy and agricultural output/food production may also fall.

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