Fewer than 500 farms a year will be impacted by the Government’s reforms to inheritance tax, a group of economic experts has claimed.

The Institute for Fiscal Studies (IFS) said “significantly fewer” than the 500 farms a year estimated by the Government will be impacted by the changes.

The economics-focused think tank said some “relatively simple tax planning” will ensure farms worth more than £2 million will not hit the threshold at which they have to start paying inheritance tax.

In a briefing note, the IFS gave its backing to measures aimed at bringing farms into the scope of the tax and added if there were specific concerns about food production then ministers should use “better tools” to support that.

Children ride toy tractors during the farmers protest in central London
Children on toy tractors during a farmers protest in central London over the changes to inheritance tax (Gareth Fuller/PA)

It did however recommend ministers tweak the rules to benefit elderly farm owners who are likely to die in the next seven years but after the new regime comes into force in 2026.

This group, the IFS said, will not have the opportunity to pass on their farms as a tax-free gift – a route available to other property owners.

“If the Government wished to give current farm owners the same opportunity to avoid inheritance tax as owners of other assets, it could, for example, make lifetime gifts of agricultural property made before a certain future date inheritance tax free, regardless of the timing of the death,” the IFS said in the briefing.

At the Budget, Chancellor Rachel Reeves announced farmers would have to pay inheritance tax on agricultural property and land worth more than £1 million at a rate of 20%, when they previously paid none.

There is a higher threshold of £3 million for couples passing on their farms.

While ministers estimate some three quarters of farmers will not be affected by the changes, the National Farmers Union (NFU) and others disagree.

The NFU expressed particular concern with plans to roll together agricultural property tax relief and business property relief, which it claims would bring more farms into the scope of the tax.

David Sturrock, a senior research economist at the IFS and one of the briefing’s authors, said: “If we have an inheritance tax it should apply equally across all types of assets, unless there are compelling reasons to deviate from that.

“Inheritance tax relief for agricultural and business assets favours those whose wealth is held in these forms rather than others.

“It also provides a tax incentive for agricultural land to be used by the wealthy as a way to avoid inheritance tax.

“That is unfair, inefficient and creates economic costs.”

He added: “Those objecting to the change claim that paying IHT (inheritance tax) will have detrimental effects on food production or the environment.

“But if Government wishes to promote food production or certain uses of land, there are much better ways of doing so than through an inheritance tax break.”

The Liberal Democrats sought to characterise the IFS’s recommendations as an “overhaul”, after accusing ministers of having “hid behind” the think tank to justify the changes.

Lib Dem environment spokesman Tim Farron MP added: “It would be beggars belief for the Government to continue to push forward with these stupid plans.

“They need to swallow their pride, realise the damage this family farm tax will do and axe the tax.”