New clarification from HMRC about how inheritance tax bills will be calculated from April 2026 onwards will help ease the tax burden for many farmers across the UK.

A spokesperson for HMRC confirmed to the Irish Farmers Journal that the 50% relief which is available on agricultural property over £1m will apply to the value of the asset.

Before now, guidance from the UK Treasury had suggested that the 50% relief applied to rate of inheritance tax, taking it from the standard rate of 40% to a half rate of 20%.

The clarity on this technical detail has important implications for farmers as it is likely to reduce and even eliminate inheritance tax liabilities in many cases.

To show how this works in practice, take the example of a single farmer who passes away after April 2026 with an estate worth £1.7m.

The first £1m gets 100% relief from inheritance tax under agricultural property relief (APR).

This takes the value of the estate for tax calculations to £700,000. The 50% relief then applies to the remaining value which takes it to £350,000.

After that, the farmer is allowed £325,000 tax-free under the nil-rate band (NRB), plus up to another £175,000 can be available for a dwelling house under the residence nil-rate band (RNRB).

It means the NRB and RNRB are likely to cover off the remaining £350,000 value of the estate, so no inheritance tax liability will be due in this case.

However, if the 50% relief applied to the inheritance tax rate, as the guidance initially suggested, then this scenario works out very differently.

The £1m exemption under APR would still apply, as would the NRB and RNRB allowances. If we assume this farmer is eligible for the RNRB in full, these three reliefs combined come to £1.5m.

But the estate is worth £1.7m, so that still leaves £200,000 taxable. If the 50% relief was applied to the inheritance tax rate taking it from 40% to 20%, then it instead would leave an inheritance tax bill of £40,000.

Higher value farms

For higher-value estates, applying the 50% relief on the value of the asset instead of the tax rate, also leads to different outcomes.

An example is a single farmer who passes away with an estate worth £3m. Again, £1m of APR applies which takes the value to £2m and the 50% relief after that takes it to £1m.

This estate will not be eligible for the RNRB as it is over £2.7m in value, but the £325,000 NRB still applies which takes the taxable value from £1m to £675,000.

At the 40% rate of inheritance tax, it means a tax liability of £270,000 is due on this estate.

However, if the 50% relief was applied to the tax rate instead of the estate value, our calculations indicate that a tax bill of £335,000 would be due instead.

HMRC have confirmed that this is not the case, so the clarification should mean more farms are lifted out of the scope of inheritance tax and, for those that are still impacted, slightly less tax will be due than initially suggested.

It should also be noted that other steps can be taken to reduce and potentially eliminate inheritance tax liabilities, although this requires careful planning and professional advice.

Confusion reigns on inheritance tax plans

The confirmation from HMRC about how the 50% relief for inheritance tax will work in practice appears to contradict guidance which was initially published by the UK Treasury.

The issue has caused significant confusion among tax experts in recent days, although it is now well accepted that the 50% relief applies to estate values, and not the tax rate.

“The Treasury now accepts it made a mistake setting everyone off on a wrong track,” an agricultural law expert told the Irish Farmers Journal.

“I suspect the amount of time civil servants spent on this reflected the amount of money involved as a proportion of the overall Autumn Budget, which is not much,” said a London-based tax lawyer.