How to Avoid Inheritance Tax on Farmland

If you’re a landowner or part of a farming family, understanding how to avoid inheritance tax on farmland could save your estate a significant amount. Inheritance Tax (IHT) can be a major threat to the continuation of family farms, but the good news is there are legal strategies in the UK that can help reduce or even eliminate this burden. This article walks you through those options in plain English.

What is Inheritance Tax and Why Does It Apply to Farmland?

Inheritance Tax is levied at 40% on estates exceeding the standard nil-rate band of £325,000. Farmland often exceeds this value due to its size and potential for development. Without proper planning, your heirs could face a hefty tax bill, forcing the sale of family land to cover the liability. This not only puts your family’s legacy at risk but can also destabilise your entire estate plan.

How to Avoid Inheritance Tax on Farmland: Agricultural Property Relief

The most effective way to reduce IHT on farmland is through Agricultural Property Relief (APR). APR can reduce the value of qualifying farmland by up to 100% for tax purposes. However, certain conditions must be met:

• The land must be actively used for agricultural purposes such as growing crops or rearing livestock
• It must be owned and occupied for at least two years, or owned and let for at least seven years
• Buildings and farmhouses must be of a character appropriate to the farmland and in regular use

APR covers farmland, farm buildings, and even the farmhouse—but only if it is deemed essential to the operation of the farm. A country home with no role in farming may be disqualified, making documentation essential.

Business Property Relief (BPR): An Alternative for Diversified Farms

If your land is also used for non-agricultural purposes, like holiday rentals, solar panel fields, or equestrian facilities, Business Property Relief (BPR) might apply instead. BPR offers up to 100% relief on business assets, provided the business is trading and not investment-based. You must also meet ownership and operation timeframes, and show that the non-agricultural ventures are an active part of your business.

Planning Strategies to Avoid Inheritance Tax on Farmland

1. Keep Farming Activities Active

HMRC requires proof of agricultural use. Maintain detailed records, keep tenancy agreements up to date, and ensure the land is being actively farmed up to the point of death or asset transfer. Evidence such as livestock logs, produce sales, and soil treatment can strengthen your APR claim.

2. Use a Trust to Pass on Farmland

Setting up a trust, such as a Family Protection Trust, allows you to pass down farmland while retaining control. Trusts also provide protection against care home fees and can offer probate advantages. With the correct drafting, farmland placed in a trust may retain eligibility for APR or BPR, making it a powerful inheritance tax planning tool.

3. Plan Your Will Around Tax Relief

Your will should clearly reflect ownership and transfer intentions regarding farmland. Allocating specific assets to individuals who will continue agricultural operations supports APR eligibility. A professionally drafted will that accounts for BPR and APR criteria is vital for maximising available reliefs.

4. Incorporate or Restructure the Business

In some cases, restructuring the farm as a trading company or Limited Liability Partnership (LLP) may provide additional advantages. This can open up further BPR opportunities and simplify the valuation of business assets for inheritance purposes.

How to Avoid Inheritance Tax on Farmland with Mixed Use

Many farms are now diversified to include rental cottages, solar arrays, retail barns, or tourism ventures. While these may not qualify for APR, they may still be eligible for BPR if they are part of a trading business. The key is to ensure the business is not primarily investment-based, such as land held purely for rent. Accurate segmentation of your estate with expert guidance ensures the appropriate relief applies to each part.

Examples of Effective Farmland Inheritance Planning

Take the case of a 180-acre farm valued at £1.8 million. If 130 acres qualify for APR and the remaining 50 acres are used for a trading glamping business eligible under BPR, the estate could pass entirely tax-free to the next generation. This could save over £700,000 in tax, preserve the farm for future use, and avoid a forced sale of assets.

Common Pitfalls to Avoid

• Failing to prove active farming: Fields left fallow, leased informally, or not generating income may not qualify for APR.
• Overdeveloped farmhouses: Homes that are large, modernised, and not connected to farming activity risk disqualification.
• No written succession plan: A lack of clarity on who inherits the land can create disputes and increase the risk of IHT being applied.

These pitfalls can be avoided through proper documentation, family discussions, and early engagement with legal and tax professionals.

UK Law and HMRC Rules for Inheritance Tax Relief

All reliefs must comply with the Inheritance Tax Act 1984. HMRC is increasingly strict in assessing eligibility, especially for claims involving farmhouses or diversified enterprises. Even where the land has been in the family for generations, failing to meet technical requirements can lead to substantial tax charges. It’s important to seek advice based on current case law and up-to-date HMRC guidance.

Watch: Everything You Need to Know About Inheritance Tax

Still confused? Watch this video to get an easy overview of how IHT works and what reliefs are available for farmland:

Final Tips on How to Avoid Inheritance Tax on Farmland

If you want to avoid inheritance tax on farmland, you need to be proactive. Start with a professional consultation. Review your will, business structure, and current use of land. Assess whether all your farming and diversification activities meet the criteria for relief. Tailored advice will help you align your farm’s structure, usage, and legal documentation with available tax reliefs.

📅 Book a free consultation with MP Estate Planning to secure your farm’s future today.

Further Reading

• Inheritance Tax Planning Services
• How Much Inheritance Tax on £1 Million?
• Avoiding IHT After the Second Parent Dies
• Gov.uk: Agricultural Relief Guidance

Don’t let your farmland become a liability. With the right plan, you can protect your land, your family, and your legacy for generations to come.