Ministers will increase the threshold for taxing inherited farmland from £1m to £2.5m after months of pressure from campaigners and MPs representing rural areas.

In a statement slipped out just before Christmas, the environment department announced the U-turn, which will apply from April when the tax kicks in.

Plans to tax inherited agricultural assets worth more than £1m at a rate of 20% were announced in Rachel Reeves’s first budget last year.

The change reversed tax relief that has existed in its modern form since the 1980s. Above the £1m threshold, inherited farmland was to have been taxed at 20%, half the standard inheritance tax rate, in a move initially estimated to raise £520m annually by 2029.

The announcement was labelled a “family farm tax” by critics and triggered protests around the UK, with farmers arguing it would prevent many of them from passing on their farms to their children.

The reversal follows intensive behind-the-scenes efforts from a group of Labour MPs who had been pushing for the threshold to be changed, and who made their case to Treasury and environment ministers as well as Keir Starmer.

The prime minister conceded at a select committee hearing last week that he had been told of terminally ill farmers planning to kill themselves to avoid the tax.

Downing Street sources indicated that a number of backbenchers had “built a strong evidence base” and argued privately against the tax, including Starmer’s parliamentary private secretary, Jon Pearce.

Nearly a dozen MPs were involved, including the MP for Peterborough, Andrew Pakes; the MP for Aylesbury, Laura Kyrke-Smith; the MP for Buckingham and Bletchley, Callum Anderson; the MP for Hitchin, Alistair Strathern; and the MP for Hastings and Rye, Helena Dollimore.

Markus Campbell-Savours, a Labour MP who represents the rural Cumbrian seat of Penrith and Solway, was suspended from the party earlier this month for voting against the tax.

A government source said there was no change in Campbell-Savours’ suspension and that he had been disciplined for voting against a budget resolution.

In a statement announcing the U-turn, the Department for Environment, Food and Rural Affairs (Defra) said ministers had “listened to concerns of the farming community and businesses about the reforms”.

Raising the threshold will mean fewer farms will face inheritance tax – a government source said 85% would not pay the levy at all, up from 75%. According to official figures, the number of estates affected next year will be 185, down from 375.

Until now, ministers had claimed the £1m threshold would only affect very wealthy farmers who were buying up agricultural land to avoid paying inheritance tax.

The climbdown is the latest policy U-turn by Reeves. The government previously abandoned plans to axe winter fuel allowance for most pensioners and ditched mooted cuts to disability benefits after a parliamentary backlash.

The change means married couples with estates of up to £5m will now pay no inheritance tax on them, as they can combine two £2.5m allowances. It will cost the exchequer £130m, meaning the changes are still expected to raise nearly £300m a year.

The 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.”

The National Farmers’ Union president, Tom Bradshaw, hailed the announcement as a “huge relief to many” that would greatly reduce the tax burden for many family farms.

“I am thankful common sense has prevailed and government has listened. I have had two very constructive meetings with prime minister Sir Keir Starmer and dozens of conversations with Defra secretary of state Emma Reynolds. She has played a key role underlining the human impact of this tax.

“These conversations have led to today’s changes which were so desperately needed. From the start, the government said it was trying to protect the family farm and the change announced today brings this much closer to reality for many.”

The Conservative leader, Kemi Badenoch, said the change was a big win for the Tories’ campaign against the tax.

“Earlier this year, I was told to drop our campaign, that there weren’t many votes in it, there weren’t many farmers, and people assumed they were wealthy enough to cope anyway. I ignored the advice and kept campaigning,” she said. “Farmers are exactly the kind of people Conservatives stand up for.”

The Liberal Democrats urged ministers to go further and scrap inheritance tax on farms entirely. Reform UK’s deputy leader, Richard Tice, said the concession was better than nothing but also called for the tax to be abolished.

The Labour Rural Research Group, which represents Labour MPs in rural seats, welcomed the announcement. Jenny Riddell-Carpenter, the MP for Suffolk Coastal and the group’s chair, said it meant “fewer families facing impossible choices, and greater certainty that farms can continue to operate, invest, and contribute to our rural economy”.