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 limited to the "agricultural value" of the land rather than full market value, while farm equipment, machinery and livestock attracts BPR. APR and BPR were increased to 100 per cent (from 50 per cent) by the John Major Government in 1992 in order to ensure that the death of the farmer would not prevent the continuing operation of a working farm. Working farms are often cash-poor. If IHT could be levied on a working farm, a natural outcome would be that land would need to be sold to pay the IHT thereby challenging the ability of the farm to operate. Further, 100 per cent APR and BPR encourage farmers to plough back profits into the business. It is not a tax "loophole". This is what was intended. None of the Blair Governments suggested that this change should be reversed. 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 unless they have diversified into other businesses, the land has development potential or there is a particularly valuable farmhouse. Normally, significant changes to IHT are brought in over extensive time with prior consultation. There was no consultation here. Even DEFRA was not informed about the proposed 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 of £650,000 still applies, 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 the proposed changes or the number of farms involved. The figure of 500 affected farms referred to by the Environment Secretary today is a "fag packet" calculation. It appears to have been calculated on the basis of APR (but not BPR) claimed by the personal representatives of deceased farm owners in previous years. I cannot help thinking that the figure is based solely on farms not operated in partnership or farms where land is held outside the partnership. As a partner has no interest in specific partnership property, the personal representatives of many deceased farm owners will claim BPR on the partnership interest rather than APR on the land itself. As both are 100 per cent, HMRC is not concerned as to which is claimed. While the true figure must be well in excess of 500 and more like the NFU figure of 7,500, it is difficult to make any sensible estimate of yield or farms affected as there are too many variables. 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 normal (non-aggressive) tax planning may reduce the yield significantly in the long term. However, such tax planning is not as simple as merely giving land to a child and hoping to survive 7 years. If the farmer continues to use the land as before, the gift with reservation of benefit rules will apply. This is the point which the Environment Secretary was at least attempting to explain when being filmed giving advice to a farmer.
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. Most investors in agricultural land require that it is farmed under a farm business tenancy. A farm business tenancy has no real security of tenure.
It is being suggested that the proposed changes might benefit farmers in the long term because the value of agricultural land will decrease. This is bewildering. If the Government wanted to decrease the value of agricultural land as an investment, the obvious way to do so would be to give all farm tenants security of tenure, succession rights and rent protection as was the position with agricultural holdings before 1995. Agricultural holdings still exist, but there are now as many farm business tenancies. In any event, the proposed changes also apply to BPR. It is impossible to see any benefit to farmers in removing the IHT benefit of investing in plant and machinery. Surely, the Government must want farmers to buy and use up-to-date plant and machinery?
Why are farmers upset by the proposed changes? 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. Farming businesses which have survived World Wars will have to end. 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. If the anticipated yield is as high as claimed by the Government, this would still be less than the overseas aid budget set aside to assist foreign farmers if linked environmental projects are included.
Why are the rest of us upset by the proposed changes? 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 incompetence in the decision making process. 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