Rural Exchange

Inheritance Tax in Farming: an analysis of Scottish farming

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Inheritance Tax in Farming: an analysis of Scottish farming

The proposed inheritance tax (IHT) cap introduces significant challenges to agricultural and business property relief. From April 2026, estates will receive 100% relief for the first £1 million of combined agricultural and business property, allowing individuals to pass on up to £1 million (or £2 million for couples) tax-free, excluding existing nil-rate and residence nil-rate bands. This results in farmers paying 20% on taxable asset values that are over the threshold. Farmers will get 10 years to pay the full amount owed, however this has caused alarm within the industry which is worried that many farms will need to be sold to repay the tax. The changes aim to target wealthier estates, though estimates of the impact vary significantly between many different groups. The UK Government stated in the Autumn Budget that 520 taxpayers will be affected in 2026/27 and the Countryside Landowners Association estimate that up to 70,000 farms could be affected.

The purpose of this report is to examine the potential impacts in Scotland. We do this through examining the unweighted Farm Business Survey (FBS) to examine the scale of farm exposure to this change by a number of key factors, such as type and size. Although this data set offers detailed information on farm assets and incomes, it is focused on commercial farming enterprises. The relief cap combines both agricultural and business property relief and it is not possible to account for other, non-farm, assets, that would create greater exposure to IHT. Hence this research can only provide an indication of the potential impacts of the IHT, where individual circumstances will affect the actual level of exposure. The second purpose is to identify key aspects, retirement and succession planning, to identify a route to managing exposure to this threshold.

 What did we find?

Analysis of around 400 commercial farms in the Scottish Farm Business Survey (FBS) suggests that currently 27% of FBS farms falls below the lower threshold of £1 million, while 43% exceed the higher threshold of £2 million. Larger farmers, dairy farms, and general cropping enterprises are more likely to exceed the thresholds compared to smaller or less capital-intensive operations. This report is based on unweighted FBS survey results, in comparison, weighted data show it is likely that 34% of commercial farms (around 3,400 farms in Scotland) had net worth of less than £1 million and 32% (around 3,300 farms) had net worth of over £2 million in 2022-23.

For farms over the £2 million threshold, annual (10-year) estimated IHT payments could range from £1,833 to over £100,000. These payments could consume between 2%-37% of current Farm Business Income, potentially requiring the sale of assets, and/or taking on new borrowings, to meet liabilities. Farms with larger landholdings or higher asset values are more exposed, with exposure increasing with farm size and labour requirement.

Encouraging and facilitating succession planning is a mechanism to reduce tax liabilities and ensure smooth transitions. Farmers may change behaviours to mitigate tax exposure, including restructuring ownership or selling assets. Among farms near retirement (within 5-10 years), around 40% surveyed did not have a named successor in place, complicating estate planning. There are costs around succession planning and the employment of an accountant to thoroughly improve the tax efficiency of the business which haven't been included here. The IHT changes could disincentivise investment for farm productivity, as asset values increases may push farms into higher tax brackets. And clearly, a fiscal change creates increased pressure on farmers and their mental health, especially these older farmers with limited room to manoeuvre around these new rules*. 

Despite using detailed farm data there is a limit to understanding the structure of farms, and some family farms may already have complex ownership structures which could accommodate some of these impacts. Corporate structures are also difficult to identify, and it may be that land ownership becomes less transparent if farmers adopt tax efficient measures, e.g. through using trusts.

Furthermore, the sale of assets and the IHT cap may work against increasing the productivity of Scottish farming. Increasing the value of the asset base may out a farm into a higher threshold bracket and therefore may work as a disincentive to future investment.

For more, read the full report below.

Authors: Andrew Barnes (Department of Rural Economy, Environment and Society, SRUC), Lorna Pate (Department of Rural Economy, Environment and Society, SRUC) and Sascha Grierson (SAC Consulting, Perth Office)

* RSABI offers emotional support for people in the Scottish agricultural industry. They are available on: 0808 1234 555

This analysis is not tax advice, and we recommend you speak to a tax advisor before any decisions are made on the farm.

We are grateful to Jeremy Moody from the CAAV for valuable comments. All opinions expressed are our own.


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