The farm inheritance tax U-turn doesn’t fix the real problem

The government’s decision to water down its proposed inheritance tax changes for farms will be welcomed by many, but it should not be mistaken for a solution.

Raising the threshold from £1 million to £2.5 million, and allowing couples to pass on up to £5 million in qualifying agricultural assets tax-free, is clearly a response to sustained pressure. Months of protests, internal Labour unease, and very public warnings from rural MPs made the original policy politically untenable. This announcement is less a rethink and more an admission that the original proposal misunderstood how farming actually works.

The government’s core argument has always been that the policy was designed to target wealthy investors using farmland as a tax shelter, not genuine working farms. In theory, that sounds reasonable. In practice, it collapses under even light scrutiny.

Land values do not reflect liquidity. A family farm can easily exceed £2.5 million on paper while generating modest, sometimes precarious, annual income. Expensive machinery, rising labour costs, volatile commodity prices, and increasingly unpredictable weather already leave many farms operating on thin margins. Taxing inherited land based on asset value rather than cash reality forces families into impossible decisions, sell land, break up businesses, or take on debt simply to pay a bill triggered by a death.

The revised threshold will take some farms out of immediate danger, but it does not address the underlying flaw in the policy. Above the threshold, a 50 percent relief still applies, meaning families can face significant liabilities while remaining asset rich and cash poor. That is not a loophole, it is a structural problem.

There is also a deeper strategic contradiction at play. At the same time as introducing this policy, the government talks about food security, domestic production, sustainability, and protecting rural communities. These objectives are incompatible with tax measures that destabilise multi-generation farming businesses and discourage long-term planning. You cannot ask farmers to think in decades while taxing them in a way that forces short-term asset sales.

The timing of the announcement raises further questions. Issuing the change after Parliament had broken for Christmas, having only recently pushed MPs to vote through the original plan, has understandably irritated backbenchers. It reinforces the perception of reactive policymaking rather than considered reform.

None of this is to argue that the tax system should remain frozen forever. Reform can be necessary, especially where genuine abuse exists. But effective reform requires precision. Targeting passive land banking by corporate investors is not the same as taxing operational family farms, yet the current framework still struggles to separate the two in a meaningful way.

If the government genuinely wants to close loopholes without damaging the backbone of rural Britain, it needs a more sophisticated approach. That means recognising the difference between land held as a financial instrument and land worked as a business, factoring in income not just asset value, and engaging properly with those who understand the sector from the ground up.

This U-turn limits the immediate damage, but it does not resolve the fundamental tension. Until policy reflects how farms actually function, rather than how they appear on a balance sheet, this issue will not go away.