Proposed changes to Inheritance Tax Reliefs – would hit farmers hard

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.

Find out more

For further guidance regarding your agricultural business, please contact partner in Farming and Rural Business, Keith Porter.

Thank you to our partners at MHA MacIntyre Hudson where this content was posted originally.