Government proposals to tax inherited farmland have been watered down, with the planned threshold increasing from £1m to £2.5m.

The climbdown follows months of protests by farmers and concern from some Labour backbenchers.

At last year’s Budget, ministers said they would start imposing a 20% tax on inherited agricultural assets worth more than £1m from April 2026, ending the 100% tax relief that had been in place since the 1980s.

In an announcement put out after MPs had left Parliament for the Christmas recess, Environment Secretary Emma Reynolds said: “We have listened closely to farmers across the country and we are making changes today to protect more ordinary family farms.”

“It’s only right that larger estates contribute more, while we back the farms and trading businesses that are the backbone of Britain’s rural communities, ” she said.

Head of the National Farmers’ Union Tom Bradshaw welcomed the change, telling BBC Radio 5 Live it “takes out many family farms from the eye of a pernicious storm”.

Gavin Lane, president of the Country Land and Business Association, said: “The government deserves credit for recognising the flaws in the original policy and changing course.

“However, this announcement only limits the damage – it doesn’t eradicate it entirely.

“Many family businesses will own enough expensive machinery and land to be valued above the threshold, yet still operate on such narrow profit margins that this tax burden remains unaffordable.”

Ben Ardern, a farmer from Derbyshire, told the BBC said it was “a step in the right direction”.

He said the government should “drop it [the tax] for family farms… and just tax the people who have got the money to tax.

“The big corporations who have just buried money into land – they’re not farmers, they have just done it to avoid tax. Farmers haven’t bought land to avoid tax, we’ve bought land to farm it and grow food.”

In the 14 months since the initial proposal was announced, there have been regular protests by farmers outside Parliament.

Some Labour MPs in rural areas have also expressed concern. At a recent parliamentary vote on the plan, a dozen backbenchers abstained and one, Markus Campbell-Savours, voted against.

Campbell-Savours was subsequently suspended for voting against the government, meaning he now sits as an independent MP.

John Whitby, a Labour MP from the Rural Research Group of backbenchers, said the government’s climbdown on inheritance tax was “fantastic news”.

But one Labour source described the timing of the change as “bizarre”.

They added that many MPs would be annoyed as “they were made to vote for it so recently”.

Conservative leader Kemi Badenoch said in a post on social media: “This fight isn’t finished.

“Other family businesses are still affected by Labour’s tax raid, and we will keep pushing until the tax is lifted from them too.”

Liberal Democrat spokesperson Tim Farron MP said: “It is utterly inexcusable that family farmers have been put through over a year of uncertainty and anguish since the government first announced these changes.

“We demand that the government scraps this unfair tax in full and if they refuse to, Liberal Democrats will submit amendments in the new year to bring it down.”

Reform UK deputy leader Richard Tice said: “This cynical climbdown – whilst better than nothing – does little to address the year of anxiety that farmers have faced in planning to protect their livelihoods… with British agriculture hanging by a thread, the government must go further and abolish this callous farms tax.”

In her first Budget in 2024, Chancellor Rachel Reeves announced she would be reversing the 100% inheritance tax relief on agricultural assets that had been in place since the 1980s.

The move would have seen inherited agricultural assets worth over £1m taxed at 20%, half the standard inheritance tax rate, raising an estimated £520m annually by 2029.

The government had argued that the change would protect smaller farms while stopping wealthy investors from buying farmland as a tax loophole.

However, it has now stepped back from the original proposal raising the threshold level to £2.5m.

Coupled with an exemption which allows farmers to pass on assets to their spouses tax-free, this new government concession means a couple could pass on up to £5m in qualifying assets, without paying tax.

Above the threshold, a 50% relief will be applied to the remaining assets.

According to the government, the number of estates in the UK expected to pay more inheritance tax in 2026/27 will be reduced from around 2,000 under the original plans to 1,100 under the new proposal.

A Treasury source said changing the thresholds would cost the government £130m, but that there were “no plans” for the policy to be scrapped entirely.

“The principle of reforming the tax system remains,” the source said. “It’s right that the wealthiest estates pay their fair share, but smaller farms will get help.”

The climbdown is the latest in a series of U-turns the government has made since being elected in July 2024.

Earlier this year the government eased cuts to winter fuel payments and backtracked on plans to make £5bn of cuts to the welfare bill.