Inheritance Tax (“IHT”) is levied on the value of the estate of the deceased or on a gift made by the deceased less than 7 years before death. Transfers to a spouse or civil partner are exempt. After the deduction of the applicable nil-rate band, the IHT which is payable depends on the nature of the assets in the estate or given during the lifetime.
At present, nearly all of the assets used in a working farm will attract either agricultural property relief (“APR”) or business property relief (“BPR”) at 100 per cent. Agricultural land attracts APR, while farm equipment, machinery and livestock attracts BPR. APR at 100 per cent was introduced by John Major in 1992 in order to ensure that the death of the farmer would not prevent the continuing operation of the farm. If IHT could be levied on a working farm, the natural outcome would be that agricultural land would need to be sold to pay the IHT thereby challenging the ability of the farm to operate. APR applies to the owner of the land. An investor can claim APR but only if the land is farmed.
The applicability of APR or BPR at 100 per cent on all or the vast majority of farm assets has meant that most farmers have never needed to take tax planning advice. Normally, significant changes to IHT are brought in over extensive time with prior consultation. There was no consultation here. DEFRA was not informed about the changes until the evening before the Budget.
From April 2026 100 per cent APR and BPR on any transfer by death or lifetime transfer will only apply to the first £1million of assets. That is a mere 17 months away. Thereafter, APR and BPR will be at 50 per cent. The Budget speech is unclear as to whether the £1 million limit applies to the whole assets of a farm or to the capital account of any partner. It is a poorly written speech. Partnership is not referred to at all.
The Chancellor of the Exchequer has stated that the “effective” threshold for IHT on farms could be as high as £3 million. It is difficult to see how this figure has been calculated. The single transferable nil-rate band still applies. The single transferable nil rate band is now £650,000, so the “effective” threshold could be said to be £1.65 million. However, the nil rate band of the first to die can only be used by the second if the marriage or civil partnership was ended by death. Insofar as the Government has considered this in assessing the burden on farmers, it fails to take into account the record rate of divorce in the farming community. The individual nil rate band is only £325,000 and there are very many “small family farms” with assets of over £1.325million.
The Government has not made any sensible estimate of the yield from this alteration to IHT or the number of farms involved. The figure of 500 affected farms referred to by the Environment Minister today is a "fag packet" calculation. In reality, it is impossible to make any sensible estimate of yield or farms affected as there are too many variables. Agricultural land values are likely to plummet and this will affect yield. We are moving from a regime where farmers have generally not taken tax planning advice to one in which they would be foolish not to do so. The effect of simple and non-aggressive tax planning will reduce the yield significantly in the long term. In reality, IHT will fall on farmers who have not planned ahead due to the speed of the changes. Any tax which falls only on those who have not had the chance to plan ahead is an unfair one.
In practice, it is not possible to remove 100 per cent APR for investors in agricultural land and retain it for owner/farmers. Investors will just serve notices to quit on their tenants. This is happening already at an alarming scale.
Why are farmers upset by the change? The main reason is that agricultural land will need to be sold in order to pay the IHT. This will make many farms uneconomic to run. Further, any such sale will be made into a buyer’s market. It is highly likely that the value of agricultural land will fall significantly.
Why are the rest of us upset by the change? For many of us, farming is in our blood. My father was born and raised on a farm. His youngest brother still operates it. Without farms there is no food and no farming communities. Most sensible people believe that those who work hard should be able to pass on the rewards of such work to their children. I advise farmers on a regular basis. They are hard-working, resilient and self-reliant. These are traits which this Government hates. Personally, what I hate most is the sheer level of incompetence in the process which the Government has adopted to assess yield and detriment. In reality, the cabinet has nobody with any level of commercial experience or acumen.
This Party is committed to reversing the change once back in office. It supports farmers and farming communities fully.
Sean Kelly (Secretary) 22nd November 2024