UK Farm Tax 2026: Beyond Inheritance Tax

Last updated: May 2026. This guide covers the working-year taxes a UK farm pays alongside the inheritance tax reforms that took effect on 6 April 2026: VAT on horticulture and field veg, income tax and Class 4 National Insurance for sole traders, capital allowances on machinery and buildings, corporation tax for farming companies, the trading-status test that protects Business Property Relief, capital gains tax on land sales, the taxable status of SFI and grant income, and the live timetable for Making Tax Digital for Income Tax. General information, not tailored advice. See the action list at the end for what to do this season.

I sat down at the kitchen table the first weekend in May with two stacks of paper, a mug of tea and the missus telling me I’d promised to do this before sweetcorn went in. One stack was the year’s VAT returns. The other was the year-end pack our accountant had sent over for sign-off. After twenty-three years on this holding, the first twenty-one in salad and field veg and the last two with a slice of wheat and oilseed in the rotation, I thought I’d seen every shape a farm tax bill could take. I had not.

Most of the talk in farming for the last eighteen months has been inheritance tax. That’s covered properly in our Farm Inheritance Tax After the 2024 Budget guide, and the headlines deserved every column inch. But what most working farmers pay tax on, year in year out, isn’t IHT. It’s the VAT, the income tax, the Class 4, the capital allowances, the CGT on a field sold to a neighbour, the corporation tax on the limited company we set up for the cold store, and the taxable lump sums from SFI agreements that landed in the bank account this winter. That’s the working-year tax stack, and getting it half right costs money that won’t ever come back.

This is the conversation I’ve had with our accountant over the last two seasons, written down for the next farmer at the table.

VAT: zero-rated food, standard-rated everything else

Most of what we sell off this holding is zero-rated for VAT. Food for human consumption, including most fresh fruit and vegetables, sits at the 0% rate under group 1, schedule 8 of the Value Added Tax Act 1994.[1] That covers iceberg, baby-leaf, brassicas, salad onions, the wheat going for milling, the oilseed off the combine, live animals of a kind generally used as food, and seed for those crops. We charge no VAT on the invoice and our customers pay none.

The trick is on the other side. The inputs we buy to grow that produce are mostly standard-rated at 20%. Fertiliser, sprays, fuel for the irrigators, electricity for the cold store, machinery, packaging, transport. Because we make zero-rated supplies, we’re still a fully taxable business for VAT, and we reclaim that input tax in full. The VAT return is, for most veg holdings, a quarterly refund.

A few quirks catch growers out. Ornamental plants, cut flowers and turf are standard-rated, not zero-rated, even though they look like horticulture. Livestock not generally used for food (horses, alpacas, ornamental fowl) are standard-rated. Catering supplies of food, including any salad we’d ever sell ready-prepared with a fork, jump up to 20%. And the farm shop margin sits in mixed territory: cold sandwiches zero, hot pasties standard, cake from the counter zero until you sit down, when it becomes standard.[2] We don’t run a farm shop. The neighbour who does has spent more on her till software than I have on a sprayer.

The VAT registration threshold rose to £90,000 of taxable turnover from 1 April 2024.[3] Almost any commercial farm passes it without thinking. Once you’re in, you’re in, and the choice of returns frequency (quarterly, annual) and the agricultural flat-rate scheme each have their place. The flat-rate scheme is rarely worth the candle for a holding that’s a regular VAT reclaimer.

If I’m honest, the VAT return is the one piece of farm admin I find genuinely satisfying. You get money back. Not many bits of paperwork do that.

Income tax and Class 4 for sole traders

Most farms in this country still trade as sole traders or partnerships, taxed under the Income Tax (Trading and Other Income) Act 2005 on the profits of the trade.[4] Profits are computed on an accruals basis (with the cash basis available for small businesses, default for sole traders from April 2024 under the Finance (No.2) Act 2023), with farm-specific adjustments for stock, herd basis elections, and crops in the ground at year end.

The 2025/26 bands are the ones we’ve been planning around: personal allowance £12,570, basic rate 20% to £50,270, higher rate 40% to £125,140, additional rate 45% above that, with the personal allowance tapered away once income passes £100,000.[5] Class 4 National Insurance bites alongside: 6% on profits between £12,570 and £50,270, 2% above. Class 2 NIC was effectively abolished from 6 April 2024 for most self-employed people, though you can still pay it voluntarily to keep your state pension record clean if your profits are below the small-profits threshold.[6] Voluntary Class 2 is one of the cheapest pension purchases in the country, and worth a phone call to HMRC if your year was thin.

Farming has two tax tools no other trade gets: averaging and the herd basis. Farmers’ averaging under sections 221 to 225 of ITTOIA 2005 lets a sole trader or partner smooth profits across two or five tax years, which can rescue a higher-rate bill in a one-off bumper year or recover personal allowance lost to a freak spike.[7] The 5-year version was added in 2016 specifically because farm profits are now volatile in ways the system wasn’t built for. The herd basis election under sections 111 to 124 of ITTOIA 2005 treats a production herd as a capital asset rather than trading stock, with replacements expensed and a sale of the whole herd tax-free.[8] We don’t have a herd, but it’s worth flagging for any livestock farm reading along.

The piece growers get wrong most often is timing of crop stock. Lettuce in module trays on 5 April is stock at cost. Wheat in a heap on 5 April is stock at the lower of cost or net realisable value, with the standing-crop element backed out separately. The Farming Tax Manual at BIM55065 onwards is unusually readable on this.[9] Get the stock figure wrong and you push profit into the wrong year, which can cost an averaging claim two years later.

Capital allowances: AIA, SBA and the super-deduction aftermath

Plant, machinery and most farm equipment qualify for capital allowances under the Capital Allowances Act 2001. The headline tool is the Annual Investment Allowance, set at £1 million per business per year since April 2023 (permanent at that level after the temporary increases of the pandemic period).[10] A million pounds of qualifying spend, written off 100% in the year of purchase. For most family farms that covers the year’s tractor, sprayer, irrigation pump, vacuum cooler and refrigerated trailer with room to spare.

What used to be the 130% super-deduction under sections 9 to 14 of the Finance Act 2021 ran from April 2021 to March 2023 and was companies-only.[11] It’s gone. In its place, since 1 April 2023, sits Full Expensing: 100% first-year relief on qualifying new and unused main-rate plant and machinery, with 50% first-year relief on special-rate assets (long-life, integral features).[12] Full Expensing was made permanent in the Autumn Statement 2023. Two important catches: it’s companies only, and it’s new-and-unused only. A sole trader still gets the AIA, which on most farm investments is the same outcome. A company buying second-hand kit falls back to writing-down allowances at 18% on the main rate pool, or 6% on the special-rate pool.

The Structures and Buildings Allowance is the slower-burn one. SBA gives a 3% straight-line writing-down allowance on qualifying non-residential structures and buildings, including farm buildings, polytunnels (in some cases), silage clamps, grain stores, pack houses and farm offices.[13] You need an allowance statement to claim it, and the relief runs over 33 and a third years. On the new pack house we put up in 2024, the SBA is worth about £6,000 a year in allowable deduction for the next three decades. It’s not the AIA. It’s not nothing.

A few honest traps. Farmhouses don’t get SBA (residential is out). Glasshouses can qualify as plant, depending on use, with case law going back to Cooke v Beach Station Caravans. Reservoirs are an unusual one; the abstraction infrastructure can be plant. Where in doubt, instruct a capital allowances specialist before signing the spec, not afterwards.

Where I land on this: don’t let the tax tail wag the spending dog. Buy the kit you need, when you need it, and let the AIA fall where it falls. The number of farms I’ve seen buy a tractor in March they didn’t really want, to “use up the allowance”, is depressing.

Corporation tax: when the company wrapper earns its keep

A growing number of family farms now operate at least partly through a limited company. Corporation tax sits at 25% on profits above £250,000, 19% on profits up to £50,000, with marginal relief tapering the rate between those bands.[14] Those rates have been in place since 1 April 2023 under the Finance Act 2021 and Finance Act 2022.

For most family farms turning over a couple of million but earning a working profit of £80,000 to £180,000, the effective marginal rate sits somewhere in the low twenties. Add dividend tax on the way out and the math is less obviously favourable than the headlines suggest. The company wrapper earns its keep when (a) profits are being reinvested in the business rather than drawn out, (b) Full Expensing on new plant gives a faster write-off than the sole-trader AIA would, (c) the next-generation transition is going to involve gifting shares rather than partnership shares, and (d) there’s a real argument for ring-fencing the diversification (the cold store, the packhouse let to a neighbour, the holiday cottages) inside a separate trading company.

Where the company wrapper earns nothing is on a sole-trader holding doing £40,000 of profit a year, with no plans to scale and no succession question to solve. Putting that into a company adds payroll, RTI, dividend admin and an accountancy bill, for negligible gain.

The trading status test: protecting BPR alongside everything else

This is the bit that ties the working-year tax stack back to the IHT reforms. Business Property Relief on the company shares, or on a partnership share, only gives 100% relief if the business is “wholly or mainly” trading. The test is in section 105(3) of the Inheritance Tax Act 1984: a business is excluded from BPR if it consists “wholly or mainly of making or holding investments”.[15]

The case law is unkind to mixed businesses. The First-tier Tribunal and Upper Tribunal decisions in Pawson, Vigne, Personal Representatives of Grace Joyce Graham, Cox v HMRC, and the Brander line have shaped a test that looks at activities, time, capital employed, turnover and profit, and asks in the round whether the business is trading or investment.[16] On a working farm with a couple of holiday lets, BPR usually survives. On a diversified estate where the let cottages and ground-let solar generate more than half the turnover and a fraction of the labour, BPR can be lost on the whole business.

After the 2026 reforms cap full relief at £2.5 million per individual, the trading-status question is still the gate. If the test fails, there’s no relief at all on the company shares or partnership share, and the full estate value sits in the IHT net at 40%. Losing the test entirely is far worse than being capped.

Practical points that come up in our accountant’s office every year. Holiday lets count as investment unless services are at the level of a hotel (think serviced apartment, not Airbnb). Let cottages on an AST count as investment, period. FIT-style solar generation income, where you sell to the grid under contract, counts as investment. Anaerobic digestion plants depend on the contract structure and the operating company’s setup. A bare ground-lease for a solar farm is investment income, with the land typically falling out of APR too.

What I’d actually do, on any holding doing more than 20% of its turnover from non-farming sources, is sit down with a chartered tax adviser once every three years and run the Balfour matrix on the business as it stands. The matrix isn’t statutory. It’s the framework HMRC and the Tribunals actually use, and you’d rather know now than after the executors’ meeting.

Capital gains tax: rollover, holdover and the lifetime decision

Farmland sales attract capital gains tax on the gain over base cost. The Taxation of Chargeable Gains Act 1992 is the governing statute, with the main rates from 30 October 2024 set at 18% for basic-rate taxpayers and 24% for higher-rate, for both residential and non-residential gains.[17] Business Asset Disposal Relief (the old Entrepreneurs’ Relief) gives a reduced rate on qualifying business disposals: 14% from 6 April 2025, rising to 18% from 6 April 2026, with a £1 million lifetime cap.[18]

Three reliefs do most of the heavy lifting on a working farm.

Rollover relief under sections 152 to 159 TCGA 1992 lets a farmer who sells a qualifying business asset (typically land or buildings used in the trade) defer the gain by reinvesting in another qualifying business asset within a window of one year before to three years after the disposal.[19] Sell a roadside field with hope value, buy more land elsewhere, rollover the gain into the new base cost. The gain doesn’t disappear. It sits in the new asset until that asset is sold, at which point either rollover or a charge crystallises.

Holdover relief on gifts of business assets under section 165 TCGA 1992 lets a donor and donee jointly elect to “hold over” the gain on a gift of a qualifying business asset, so the donee takes the donor’s base cost and the gain is taxed when the donee disposes.[20] This is the relief that makes lifetime succession workable, because gifting land or partnership share to the next generation otherwise crystallises CGT on a deemed market-value disposal. Holdover keeps the CGT at bay for now.

Section 260 holdover relief applies on gifts into and out of trusts that are chargeable lifetime transfers for IHT.[21] It’s broader than section 165 (the asset doesn’t have to be a business asset) but only available on trust-related transfers. It’s the reason an unwound 2008 settlement can cost a family a six-figure CGT bill if the assets have appreciated and section 260 isn’t available on the way out.

The lifetime decision the 2026 IHT reforms have forced on most family farms is the CGT-versus-IHT trade. Under the old regime, holding everything until death gave a CGT uplift to probate value (no CGT) and full APR/BPR relief (no IHT). The “do nothing” plan worked. Under the new regime, the IHT bill on an estate over the £5 million couple-level shelter is real. Gifting in lifetime can shelter that, but holdover relief defers the CGT rather than eliminating it, and section 165 doesn’t apply to bare land that isn’t used in a trade.

The arithmetic to run, on the kitchen table, looks like this. On the assumption you die on or after 6 April 2026, the IHT exposure on the slice of the estate above £5 million (couple) is 20% effective. The CGT exposure on a lifetime gift, if holdover isn’t available and the gain is taxable in your hands now, is 24% at the higher rate. If holdover is available, the CGT is parked, and the next generation only pays it when they sell. The right answer is rarely the same on two farms.

Looking back, the families round here who came through the old regime cleanest were the ones whose accountant ran the IHT and CGT numbers in the same spreadsheet, not in separate conversations.

SFI and grants: taxable income, often forgotten

The Sustainable Farming Incentive, Countryside Stewardship, Landscape Recovery, the Farming Investment Fund and the small grants that follow are all taxable as trading income in the hands of a working farm.[22] They go on the income tax or corporation tax return alongside the produce sales. HMRC’s settled view is that public payments to a trade are receipts of that trade, and the BIM55051 manual entry is explicit.[23]

What that means in cash terms is that a £20,000 SFI agreement payment in the bank account is not £20,000 in the pocket. It’s £20,000 of taxable profit, and on a higher-rate sole trader running on the upper Class 4 band, the cash retained is closer to £11,800 after income tax and NIC. Most farms I know have figured this out the hard way after their first big agreement. Set aside the tax before you spend the payment.

Capital grants on plant or buildings are usually netted off the qualifying capital cost for capital allowances purposes. So a £40,000 capital grant on a £100,000 grain store reduces the SBA pool to £60,000. There are tracking rules on this, and the Farming Tax Manual deals with them at BIM55005.[24]

The flip side: the cost of meeting an SFI action (the seed for a buffer strip, the labour for a fence repair, the contractor for a hedge survey) is allowable trading expenditure in the normal way. Don’t forget to put those costs through.

Making Tax Digital for Income Tax: live for the bigger sole traders from April 2026

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is now live for sole traders and landlords with qualifying income over £50,000, from 6 April 2026.[25] Income over £30,000 follows in April 2027. The Government extended the smaller-income threshold and added partnerships to the deferred timetable in the 2024 round of announcements.

In practical terms: digital records (spreadsheets count, with bridging software, or proper accounting software), quarterly updates to HMRC of income and expense totals, and a final declaration replacing the old Self Assessment return. Each trade reports separately. So a holding that runs a farming sole trade and a furnished-holiday-let trade files two streams of quarterly updates.

For most farms with an accountant doing the books anyway, MTD ITSA is a software cost and a discipline change rather than a substantive new tax. The accountancy fee picks up. The penalty regime is a new points-based system for late submissions, with financial penalties at four points (annual filers) or two points (quarterly).[26] Don’t drift.

The bit I underestimated, going in, was the cold-comfort fact that quarterly updates don’t change the tax payment dates. The January 31 / July 31 payment-on-account rhythm holds. You’re just filing more often, for the same bill.

R&D tax credits: occasionally worth a look

Most family farms aren’t doing R&D in the tax sense, but a slice of horticulture and livestock genetics is. The merged R&D scheme replaced the old SME and RDEC schemes for accounting periods starting on or after 1 April 2024, with a 20% above-the-line credit (taxable, so a net benefit of around 15% for a profit-making company).[27] An Enhanced R&D Intensive Support scheme runs alongside for loss-making SMEs whose qualifying R&D spend is at least 30% of total expenditure.

Where this can bite for a working farm is a packing-line automation project, a variety trial run as a genuine experimental programme, a controlled-environment growing system with novel sensor and control development, or a soil-microbiome project run in partnership with a research body. Plant breeding work, where there’s genuine technical uncertainty, qualifies. Ordinary husbandry doesn’t.

The headlines on R&D fraud have made HMRC’s compliance arm twitchy, and the bar for what counts as “scientific or technological advance” has risen. If a contingent-fee R&D adviser cold-calls promising a refund on the basis that you grew a new variety this season, hang up. If you’re genuinely innovating, instruct a chartered firm and document the project from day one.

A working-year tax checklist

Whatever the politics, these are the rules. Run through this list before the next year-end. The order matters.

1. Reconcile the VAT pool quarterly. Track input VAT on shared-use items (fuel, vehicles, utilities) with a documented apportionment method. Reclaim what you’re entitled to, no more. 2. Get the year-end stock figure right. Crops in the ground, modules in the trays, grain in the shed, livestock on the books. Wrong stock figure poisons the profit and any farmers’ averaging claim downstream. 3. Decide on averaging before signing off the accounts. Two-year or five-year, depending on the profile. Election is irrevocable for that pair (or five-year period) once made. 4. Time the AIA spending. £1 million is the annual cap. Spread spend across the year-end if you’re heading over, and keep an eye on whether SBA on a building project is more useful than AIA on plant. 5. Run the trading-status check. If non-farming turnover is over 20%, instruct a Balfour-style review every three years and document the working. 6. Plan the CGT and IHT in the same spreadsheet. Gifting land or shares with no CGT plan is half a plan. Holdover, rollover and the new IHT cap interact. 7. Set aside the tax on SFI payments before spending them. A holding-account discipline, not a year-end discipline. 8. Get MTD ITSA on a sensible footing. Pick the software, get the bookkeeper trained, file the first quarter on time. The penalty regime is points-based and unforgiving of drift.

Done properly, this list takes two evenings with the books in front of you and a phone call to your accountant. It saves more money in a working year than the IHT planning saves in a generation.

The headlines all year have been about inheritance tax. The cash that actually leaves the farm bank account goes on these other taxes, week by week, quarter by quarter. Get those right, and the IHT plan has something to protect.