Thousands of farmers descended on London this week demanding the government change its plans to introduce inheritance tax on some of their assets.

FactCheck takes a look.

What is the government’s new inheritance tax policy for farms?

As it stands, farms are almost entirely exempt from inheritance tax – thanks to two policies called Agricultural Property Relief (APR) and Business Property Relief (BPR).

Farm owners have been able to use a combination of these reliefs to transfer their farmland and associated business assets, tax-free.

But under new plans as announced in the Budget, these reliefs will be capped at a combined £1 million – so farmland and agricultural assets above this value will be subject to inheritance tax at 20 per cent.

So what would this look like in practice?

Let’s say you own a farm worth £2.2m – that’s roughly the average net worth of a farm in England, according to figures from Defra.

If you are single, the the treasury you will be able to pass on up to £1.5m of this to children or grandchildren tax-free. That’s the £1 million compensation for farm owners, plus the normal tax reliefs everyone gets, which are worth up to £500,000.

£2.2m minus £1.5m in tax relief leaves £700,000 that could be taxed.

Under the new government’s policy, £700,000 would be taxed at 20 per cent – ​​rather than the 40 per cent paid by non-farmers.

This leaves a theoretical tax bill of £140,000. You or your child can pay this off in installments over ten years, interest-free. That’s more beneficial than inheritance tax bills paid by non-farmers, who face a 7 per cent interest rate.

So that’s an annual tax bill of £14,000 for ten years, in our hypothetical example.

Now imagine you are part of a married couple and move on to a farm of the same value – £2.2 million.

The the treasury “Two people who jointly own a farm will be able to transfer land and property worth up to £3 million to a child or grandchild tax-free”. This is because you and your spouse can each give £1.5m of tax relief. (Spouses do not need to die at the same time for their heirs to benefit from the £3 million combined exemption.)

This means that in this example of a couple passing on a £2.2 million farm, your children will not pay any inheritance tax at all.

How many farms will actually pay inheritance tax?

This is where it gets complicated – but we’ll try to keep it simple.

The Treasury says around a quarter of farms will be affected by the changes – around 500 in a single year. (For context, there are around 200,000 farms in the UK.)

The Treasury estimate comes from real-world data on how many farms claimed Agricultural Property Relief (APR) on Inheritance Tax in previous years, and how many of those would now be over the threshold for paying tax.

Farming groups have said this may be an underestimate as it does not take into account diversified farms – these are farms that also run other types of businesses such as B&Bs alongside their farming operations.

These farms also use Business Property Relief (BPR) to reduce their tax burden, which is now also subject to the £million cap – and farming groups say that when the value of business assets is added, this would bring more people over the threshold to pay.

However, in response to this, the chancellor released further information. Numbers from the year ending 2022 shows that fewer than a quarter of APR and BPR claims combined were worth more than £1.5m – the amount that even a single person should be able to transfer tax-free.

So it looks like even when business relief is taken into account, we should still see only around a quarter of farms being liable for tax under the new rules.

The National and Entrepreneurs’ Association has published a slightly different figure. Its headline is that 70,000 farms will be affected by the changes – that’s around a third of all farms. (So ​​only slightly larger than the quarter of farms taxed by the Treasury.)

The reason the numbers sound so different is that the Treasury looks at how many will be affected in a single year – while the CLA estimates how many farms in the country could ever be affected.

How many farms will be hit with an inheritance tax they can’t afford to pay?

Farming groups have said that a large number of high-net-worth farms – so those with many acres and assets, who are therefore likely to be hungry for inheritance tax – have such low profits that they would not be able to pay the tax.

Is this true? Unfortunately, we won’t have a clear answer until we get more data.

It is important to note that many farms in England and Wales have tight margins and many are making a loss – farming groups are right about this.

Defra data shows that last year 30 per cent of farms made a loss, while another 25 per cent made less than £25,000.

If your profits look like this, and you’re a single person passing on a £2.2m farm – as in our example above – you could struggle to pay off a £14,000 annual tax bill .

But the key issue is that we don’t know how many farms are worth enough to potentially be taxed, while making very low or no profits.

This may be a vanishingly small number of estates, or, as farming groups have argued, it may be a significant minority. The options for farms like this one are to take on debt or sell some of their land to pay the tax – but farming groups say both of those options would only make it harder for such farms to turn a profit.

(Image credit: Tayfun Salci/ZUMA Press Wire/Shutterstock.)