A special new rule to allow farmers to pass on up to £3m without paying a penny of Inheritance Tax on it has been unveiled by Chancellor Rachel Reeves.

In the government’s Budget announcements on Wednesday, it was confirmed that a new agricultural property relief will apply for farmers to allow them to transfer allowances between themselves and their partners and thus avoid Inheritance Tax legally.

It means that the allowance for widows and widowers will be ‘doubled’ from April 2026.

In its announcement, HM Treasury and the Department for Environment, Food and Rural Affairs said: “The government has announced that any unused £1 million allowance for agricultural property relief and business property relief will be transferable between spouses and civil partners, to bring it in line with the treatment of the nil-rate band and residence nil-rate band.

“This makes the inheritance tax rules for those with agricultural and business assets less complex and fairer. This change will apply to widows and widowers, including where the first death is many years before 6 April 2026, who will now be able to benefit from double the allowance than they would have prior to the Budget 2025 changes.”

It gave an example of a spouse or civil partner owning a farm. They would following the new rule change be able to benefit from “an additional £1m allowance” compared to last year’s rules.

It explains: “It does not matter if the first spouse to die owned the farm or other agricultural assets. Their £1 million allowance can be transferred to their spouse on death if unused, leaving the surviving spouse with £2 million allowance to use against any agricultural assets in their estate.

“This leaves the surviving spouse with an allowance for agricultural property inheritance of up to £2 million (£1 million + £1 million) and a nil-rate band of up to £650,000 (£325,000 + £325,000).

“Person 1: All assets are transferred to spouse/civil partner benefitting spouse relief. Unused £325,000 + £1 million allowances are transferred to Person 2 on death. 

“Person 2: £650,000 (made up of £325,000 + £325,000) + £2 million (made up of £1 million + £1 million). 

“Total passed on tax free: £2.65 million.”

The government set out how the exemptions will apply on top of the new Inheritance Tax rules for farmers.

It said: “From 6 April 2026, the full 100% relief from inheritance tax will be restricted to the first £1 million of combined agricultural and business property. 

“Above this £1 million allowance, impacted individuals will access 50% relief from inheritance tax on qualifying assets and will pay inheritance tax at a reduced effective rate of up to 20%, rather than the standard 40%. This tax can be paid in equal instalments over 10 years interest free, rather than immediately, as with other types of inheritance tax.

“This is on top of all the other spousal exemptions and nil-rate bands that people can access for inheritance tax too. All individual estates have £325,000 tax-free threshold for inheritance tax (the nil-rate band). They may also qualify for a further residence nil-rate band of up to £175,000, if they are passing a main residence to a direct descendent.

“This means that two people with farmland, depending on their circumstances, can pass on up to £3 million without paying any inheritance tax.”

Farmers descended on London on Wednesday to protest plans, first set out in 2024, to introduce inheritance tax on farming land and businesses.

The Chancellor’s plans to introduce a 20% rate on agricultural land and businesses worth more than £1million have become a political flashpoint for a sector struggling with rising costs, tough market conditions and worsening climate impacts.

David Gunn, an arable farmer and agricultural contractor from near Sevenoaks in Kent, said he was protesting over the Government move to put inheritance tax on farm businesses worth more than £1 million.

He said: “Inheritance tax is one reason, it’s going to cripple the farmers, the small family farmers.

“There’s all the other taxes they’ve been putting on us, and the prices we get for our produce and what it costs in the shop, we don’t make any money.

“Then there’s food security, farmers are going out of business.”

He said his message to Government was: “Sort the pledge out.”