Inheritance tax reform ‘largely protects family farms’ – what are the alternatives?

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.

Yet as many as eight in 10 farm estates will be able to raise the money they need for any potential IHT bill by selling off non-farm assets only, according to a study by the Centre for the Analysis of Taxation (CenTax), which produces independent academic research on tax policy.

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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.”

We look at ways to reduce your IHT bill and common IHT myths in separate articles.

Inheritance tax reforms’ impact

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.

Alternative inheritance tax reforms

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.”