A lucky escape for tenant farmers from the new Inheritance Tax rules?

The Budget Statement in October 2024 announced some far-reaching changes to the availability of Agricultural Property Relief (APR) and Business Property Relief (BPR).

In the original announcements, and repeated in the November 2025 budget statements, APR and BPR were restricted to full relief on the first £1,000,000 of value held only, with an effective Inheritance Tax (IHT) rate of 20% on the value exceeding that amount.

The Budget announcement on 26 November 2025 did not bring much further detail but did note that the £1,000,000 allowance would be transferable between spouses. Additionally, just before Christmas 2025, an announcement followed that the IHT threshold would be increased to £2,500,000 per person. Between this increase and the ability to transfer allowances between spouses, there is now a window for some realistic and effective planning.

Since October I have heard many tenant farmers commenting that at least their tenancies will be exempted from these new rules with tenancies and the associated values remaining outwith the realms of IHT.

While there is some truth to that statement as always, it’s not quite as straightforward – and the exemption from the IHT rules is by no means universal.

A longstanding exemption

The basis for the argument sits within Section 177 of the Inheritance Tax Act 1984 and as such is based on a pre-budget part of the IHT legislation. This part of the IHT legislation contains a longstanding existing exemption, that ensures that certain Scottish agricultural leases are not subject to Inheritance Tax. The legislation and this exemption, however, have so far not been updated to take into account the more modern forms of agricultural tenancies now in use.

Stakeholders have asked the government to provide clarity on how the reforms to the reliefs will interact with the current rules on the exemption of Scottish agricultural leases and it is our understanding that the government intends to make changes to the longstanding exemption to ensure that newer equivalent Scottish leases also benefit from the exemption from Inheritance Tax. The draft legislation does refer to the intention to widen the scope of leases that will qualify and the updated finance bill now includes wording to note that the rules will apply to fixed duration tenancies that are continuing to exist by statutory default or statutory continuation provisions.

It is important to note that while the draft legislation has now been published, we do not as yet have the full detail on the new IHT rules and, as such, matters continue to evolve.

For now at least, let’s proceed on the basis that the provisions will remain in force as currently provided for in Section 177 and the current version of the finance bill, and that the reliefs or exemptions provided will remain fully available.

Which tenancies will be affected?

Section 177 contains rules relating to Scottish agricultural leases only and covers both 1991 Act tenancies being tenancies, which are usually held by virtue of tacit relocation and run from year to year, and fixed term tenancies.

The latter would mainly be Limited Duration Tenancies (LTD) or Modern Limited Duration Tenancies (MLDT).

In relation to 1991 Act tenancies, and those fixed duration tenancies continuing by statutory default, the legislation and the new wording in the finance bill provide for the value of the deceased’s estate in so far as attributable to the deceased tenant’s interest in the lease to be left out of account.

As a result, the value of the tenancy interest would not be counted for Inheritance Tax purposes. The value of the lease would still require to be confirmed to as part of the estate administration but would be returned at NIL value to HMRC.

While this is good news for Inheritance Tax, in a world where we see an increase in assignations of tenancies during lifetime for value through the relinquishment provisions or otherwise, such a return at NIL value may have the effect of increasing the potential capitals gains tax liability on a future sale or transfer of the tenancy interest.

There are a number of conditions attached to the application of the NIL value return for the valuable 1991 Act tenancies.

First of all, the lease interest must have been held by virtue of tacit relation (continuation year upon year).

Secondly, on the death of the tenant, the tenancy interest must pass to a new tenant. Thirdly, the deceased must have held the tenancy interest for a continuous period of at least two years prior to their death, or they had become tenant by way of succession.

In most scenarios, those first two conditions will be easily satisfied. The third condition, however, merits some further consideration.

Under the third condition, we require the deceased tenant to have held the tenancy for a minimum of two years or have taken on the tenancy on the death of the preceding tenant.

As a result, if the current deceased tenant took on the tenancy under a lifetime assignation or by way of an assignation on the open market under the relinquishment provisions less than two years prior to death, it would appear that such a tenant will not qualify for the NIL value return.

It is important to be aware of this and I would suggest that going forward when discussing lifetime assignations with clients this will be a key consideration.

What do these changes mean for tenant farmers?

Despite the conditions attached, it would appear that tenants under 1991 Act tenancies will be able to have the benefit of the tenancy value being excluded from their estate for Inheritance Tax. In light of the substantial values attached to some tenancy interests, that is definitely something worth having.

However, this does not mean that such tenant farmers will not have to consider the application of the new IHT rules at all. Section 177 specifically states it only applies to the value of the tenancy interest itself and excludes the value of any rights of the tenant to compensation in respect of tenant’s improvements.

Many have entered into Amnesty Agreements in relation to tenant’s improvements and where extensive or high value improvements were carried out by the tenant, the value of these on the death of the tenant will remain subject to IHT.

In addition, all other farming assets held by the tenant farmer such as livestock and machinery will also fall within the new IHT regime.

Under the new rules, and taking into account the further changes announced in December 2025, only the first £2,500,000 of farming assets will be exempt from IHT. There is no doubt that the increase of the threshold from £1,000,000 to £2,500,000 will be of great assistance to many and may even take some farms entirely out of the application of IHT, particularly where spouses are in a position to double up the allowances. However, it’s easy to see how between tenant’s improvements, livestock, machinery, and any other farmland held in ownership, the new rules will still need to be considered and appropriate succession planning advice sought.

In relation to fixed duration tenancies such as an LDT or MLDT, the rules contained in Section 177 are different.

Here the existing legislation states that in assessing the value of any interest of the deceased tenant in the remaining term of the lease the value associated with any prospect of renewal of the lease by tacit relocation will be excluded from the value of the deceased’s estate.

Essentially that means that the possibility that the lease may be extended in the future, for example because relevant notices to terminate were not served and the lease is allowed to roll on, must be ignored when valuing these fixed term tenancies.

The suggestion is of course that the value of the tenancy as it stands and the remaining term will be part of the estate subject to IHT.

It is our view that there is a strong argument to state that the value of such a tenancy is however negligible on the basis that full rent is being paid under the lease. That may change however if the LDT or MLDT was granted on favourable terms, for example on the basis of rent much below open market rent.

We can see how in such a scenario HMRC could argue that there is indeed a value in that fixed term tenancy and such value would become subject to IHT.

What next?

As always when it comes to IHT, every case will need to be considered on its own merits but it would appear that there is at least some additional relief available to tenant farmers in relation to their tenancy interests.

We will need to continue to keep our eye on further amendments to the finance bill.

In the past the farming community has benefited from substantive IHT reliefs which has often resulted in a lack of succession planning. Now that the cushion of full relief has been removed, it is more important than ever to seek relevant specialist advice that can allow steps to be taken to, where possible, reduce tax liabilities and secure the future of the farming enterprise.

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