Proposed Changes to Inheritance Tax Reliefs – Would hit Farmers Hard

05 February 2020

A proposal from the all-party parliamentary group (APPG) on Inheritance and Fairness, which was issued on 29th January would, if taken up by the Treasury, have a huge impact on the farming industry, and if it came at the same time as the changes proposed in the Agriculture Bill, could be little short of catastrophic for the industry – and for the environment.

New regime for Inheritance Tax (IHT) rules

The APPG has suggested that the current Inheritance Tax (IHT) rules are over complex and the base rate of 40% is too high, yet not enough tax is being paid by the larger estates. Accordingly a new regime should be implemented which would see:

  • A flat rate IHT charge on death and lifetime transfers of 10% or some other rate which “should be determined by policy makers”
  • All tax allowances,  except spouse and charity reliefs, to be abolished
  • An annual allowance of £30,000 on lifetime gifts
  • A death allowance of about £325,000 (£650,000 for couples)
  • Abolition of the capital gains tax (CGT) uplift on death.

These major changes to the system would remove a number of the perceived faults with the current rules, the advantages being:

  • Much simpler than current system and most families would be unaffected
  • Rate low enough to discourage planning and avoidance
  • Removes perceived unfairness of some assets escaping both CGT and IHT
  • Removes perceived unfairness that larger estates pay proportionately less tax due to APR and BPR

However, the proposed changes also come with their own problems, particularly for businesses, which would lose the reliefs which currently allow businesses to be passed on with minimal tax charges thus preventing them being broken up on death to fund tax payments with the ensuing job losses and damage to productivity. Specifically, the changes could mean:

  • Abolition of main residence band brings many more estates into charge
  • Greater complexity for trusts with special reliefs for those trusts without liquid assets
  • Pension funds to be taxed at death.
  • Favours those able to give £30k p.a.
  • CGT would become far more complicated with base costs going back many decades
  • Complexities with main residence CGT position
  • Assumes businesses and farms can find large capital sums or 1-2% of capital annually, every generation
  • Selling assets to pay the IHT will trigger additional CGT charges
  • Farming businesses, which tend to have high capital values and low annual profits, could be particularly hard hit. Coming on top of the phasing out of farm subsidies, the long term capital tax burden would represent almost the whole of the sectors earnings.

Commenting on the proposed changes, Head of Agriculture, Partner Sarah Dodds remarked: 

“Whilst we would welcome simplification of the IHT regime, and there is much to be said for a lower base rate of tax, the APPG has not given sufficient thought to the business reliefs and why parliament put them there. The agricultural industry, in particular, already has a difficult time ahead of it, and these changes would positively prevent the restructuring which the government is trying to encourage.

For example, a family farm of 400 acres which would pass down the family tax free under present rules could see a bill of over £300,000 every generation. When the earnings from businesses like this are barely £50,000 a year and that could well halve under the new subsidy rules, this is just an impossible position.

These proposals would be bad for farmers, bad for consumers and bad for the environment, with more food miles to bring in goods which would no longer be produced in the UK.”

Find out more

For further guidance regarding your agricultural business contact Head of Agriculture & Rural BusinessSarah Dodds at sarah.dodds@mhllp.co.uk