Summary:
Inheritance tax (IHT) reforms targeting agricultural and business property reliefs, set to take effect in April, have sparked concerns about their impact on family farms. However, new analysis by the Centre for the Analysis of Taxation (CenTax) reveals that up to 80% of farm estates can cover IHT bills by selling non-farm assets, avoiding the need to sell farmland. Larger estates, particularly those valued over £5 million, will bear the brunt of the tax burden, while smaller family farms remain relatively protected. The reforms aim to address inequities in relief distribution while ensuring manageable payments for affected estates.
What This Means for You:
- Assess Non-Farm Assets: Evaluate non-farm assets (e.g., investments, property) to determine if they can cover potential IHT liabilities without disrupting farm operations.
- Plan Ahead for Larger Estates: Larger estates should explore tax planning strategies to mitigate the impact of increased IHT obligations, such as instalment payments or restructuring assets.
- Stay Informed on Policy Changes: Monitor updates to IHT reforms and potential adjustments, such as the proposed ‘minimum share rule’ or ‘upper limit on relief,’ which could offer further protections.
- Future Outlook: While the reforms aim to protect family farms, continued advocacy and policy adjustments may be necessary to address unforeseen challenges for smaller estates.
Original Post:
Inheritance tax (IHT) reforms may not be as bad as first thought for family farms, with new analysis suggesting most farming estates will be able to cover the cost of any inheritance tax bill without having to sell off parts of the farm.
Campaigners say inheritance tax changes to agricultural property and business property reliefs – due to come in next April and that will see inheritance tax due at 20% on the assets of rural estates worth more than £1 million – will destroy farming communities.
Dr Andy Summers, director of CenTax and associate professor at London School of Economics & Political Science (LSE), said: “Our analysis shows the government’s reform largely protects family farms whilst limiting claims by the wealthiest estates.”
Using detailed HMRC inheritance tax data, the report estimates that around 86% of impacted farm estates could pay their entire IHT bill out of non-farm assets.
This leaves around 70 farm estates per year that could not. Of these, around 40 farm estates would face a residual bill greater than 20% of the farm’s income (after tax and depreciation), if paid in ten-year annual instalments, according to the study.
Overall the report estimates 30% of farm estates – between 480 and 600 – would be impacted by the inheritance tax reforms every year. Of these, around 200 estates per year potentially comprise family farms valued at less than £5 million.
Larger farming estates will shoulder most of the tax burden, the study found. Most (80%) of the inheritance tax receipts as a result of the government’s reforms will come from the one third (34%) of impacted estates worth over £5 million.
Less than 1% of additional tax is projected to come from the one in 10 (11%) impacted farm estates valued at less than £2 million, the report found.
Almost half (49%) of all impacted farm estates would see a tax increase of less than five percentage points (pp). All of the 25 farm estates per year facing an increase larger than 15pp are valued at over £7.5 million.
The analysis focuses on farm estates. A farm estate is not the same as a farm. It means the total net wealth of an individual who died owning some farmland or other farm assets on which they claimed relief.
This definition includes working farmers (including tenant farmers), but also investors in farmland. A farm could be split across multiple farm estates, or a farm estate could own multiple farms.
Landowners are less likely to be impacted by the reform than working farmers, according to the study, representing 64% of all farm estates but 42% of impacted farm estates. Owner-farmers represent 17% of all farm estates but 37% of impacted farm estates.
For better targeting the inheritance tax reform whilst still raising at least as much revenue overall, the report’s authors suggested a ‘minimum share rule’.
This would remove relief for passive investors in farmland and other business assets, funding an extension of 100% relief for farmers and other business owners to £5 million per estate.
Alternatively, there could be an ‘upper limit on relief’ that would cap relief at the first £10 million of claim, funding an increase in the allowance for 100% relief to £2 million per estate.
“The relief could be better targeted to reduce its use for tax planning and further extend protection for businesses, including farms,” Summers said.
A government spokesperson said: “We designed these upcoming reforms so they address stark unfairness in the distribution of reliefs, whilst ensuring that the few estates facing higher bills can pay them in a manageable way. This report supports that.
“We’re also investing billions of pounds in sustainable food production and nature’s recovery, slashing costs for food producers to export to the EU and have appointed former NFU president Baroness Minette Batters to advise on reforms to boost farmers profits.”
Extra Information:
HMRC Inheritance Tax Guidance – Official resources for understanding IHT liabilities and reliefs.
National Farmers’ Union (NFU) – Advocacy and support for UK farmers navigating tax reforms.
London School of Economics (LSE) – Academic insights into tax policy and economic impacts.
People Also Ask About:
- What is agricultural property relief (APR)? APR reduces the value of farmland and buildings for IHT purposes, often to 100%.
- How can I reduce my inheritance tax bill? Strategies include gifting assets, setting up trusts, and leveraging reliefs like APR.
- Who is most affected by IHT reforms? Larger estates valued over £5 million will bear the majority of the tax burden.
- Can I pay IHT in instalments? Yes, IHT on certain assets, including farmland, can be paid in ten yearly instalments.
Expert Opinion:
Dr Andy Summers of the LSE emphasizes that the reforms strike a balance between protecting family farms and addressing inequities in tax reliefs. However, ongoing monitoring and policy adjustments will be crucial to ensure the long-term sustainability of smaller farming estates amidst evolving tax landscapes.
Key Terms:
- Inheritance tax reforms UK
- Agricultural property relief (APR)
- Family farm tax planning
- HMRC inheritance tax data
- Tax relief for rural estates
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