Labour today came under fresh pressure to water down its inheritance tax raid on farmers after a leading think tank proposed changes to the controversial new rules.

The Institute for Fiscal Studies (IFS) suggested alterations to Chancellor Rachel Reeves’ action to prevent farmers feeling ‘unfairly treated’ by her Budget measures.

Both Ms Reeves and Prime Minister Sir Keir Starmer have faced fury from farmers after they announced reforms to inheritance tax last month.

These mean farmers will have to pay a 20 per cent rate on land and property they inherit worth more than £1million.

Ministers have insisted it will only affect the wealthiest quarter of landowners. But the National Farmers’ Union and others say the impact will be more widespread.

Critics have warned the move could wipe out family-run farms with tight margins, as they will be forced to sell up in order to pay death duties.

Thousands of people – including TV presenter Jeremy Clarkson – protested in London last week against the inheritance tax raid, dubbed Labour’s ‘family farm tax’, and warned it could imperil the UK’s food supply.

In a new report, the IFS suggested the Government could ‘tweak’ its policy to allow more current farm owners to pass on their assets tax-free.

‘One specific feature that may leave farm owners feeling unfairly treated is that those passing away in the next seven years (but after the new regime comes into force in April 2026) will not have had the opportunity to avoid inheritance tax by making lifetime gifts,’ the report said.

‘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 think tank also proposed changes to allow spouses or civil partners to inherit any unused part of the £1million tax-free allowance of their deceased partner.

‘There is certainly a good case for making unused portions of the £1million allowance inheritable by a spouse or civil partner, like the other main inheritance tax allowances are,’ the report added.

The IFS said it was ‘not surprising that those who might lose from any tax change will feel aggrieved’, adding: ‘That is their right and to be expected’.

But it added there were ‘much better tools’ to support food production in Britain.

‘Reforms to taxation of agricultural property proposed in the Budget would reduce the inheritance tax advantages enjoyed by owners of farmland but would still leave that land much more lightly taxed than most other assets,’ the report concluded.

‘The exact number that will be affected is uncertain but Government figures imply it will be significantly less than 500 estates per year.

‘Some relatively simple tax planning will ensure that many farms worth considerably more than £2million will not be liable for tax.

‘And it is important to remember that most of the inheritance tax payable will be on very valuable estates.

‘Overall, this moves our inheritance tax in the right direction. We should treat similar assets similarly for the purposes of inheritance tax, or any other tax, unless there are very good reasons not to.

‘It is not obvious that such reasons exist in this case, and if the concern is about food production or protection of the environment then much better tools exist to support those activities.’

Liberal Democrat MP Tim Farron, the party’s environment spokesperson, said: ‘The Government hid behind the IFS to try and justify this disastrous policy.

‘That very same organisation is now telling them that their own proposals need an overhaul.

‘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.’

Mo Metcalf- Fisher, external affairs director at the Countryside Alliance said: ‘For weeks now, there have been twists and turns in the sorry saga that is Rachel Reeves’ farm tax hike.

‘So much of the anger, frustration and heartache felt by farmers and the rural community could have been avoided if the Treasury consulted with relevant stakeholders in the buildup to the Budget announcement.

‘The Treasury needs to urgently rethink its policy and work with the countryside to find a way out of this mess before it’s too late’.