The Budget proposals concerning inheritance tax on farms and farm businesses have understandably created a furore amongst farmers and landowners. Civil disobedience and the interruption of food chains could result. Both sides should be considering whether a compromise could be agreed.
Ostensibly to justify the changes, the government has said that they are “better targeting reliefs to make them fairer, protecting small family farms”. They cite figures to indicate that the highest 9% of claims (154 claims in total) accounted for 62% of all agricultural property relief claims, costing £338m in tax. Their argument is that it is not fair for a very small number of claimants each year to claim such a significant amount of relief, when the money could better be used to fund public services.
If these figures are correct, then it looks like the changes may raise some tax revenue for the government once introduced, but in the wider context a few hundred million may not have the desired impact. Angry taxpayers will doubtless also be doing all the planning they possibly can to ensure that the government receives as little of this as possible.
Considering other reasons why the Government may have announced these changes. It may consider that the agricultural property relief rules allow wealthy individual taxpayers to buy farms mainly to take advantage of the 100% relief which is available currently, in most cases, on the death of a farmer who has owned and farmed the land for more than 2 years.
Under current legislation it is reasonably clear that if an individual taxpayer raises cash to buy a farm, farms it for 2 years, and then dies, his successors could claim the relief and pay no inheritance tax on either the land or, if it has since been sold, its proceeds of sale. If the farm is sold little or no capital gains tax should be payable either due to the uplift in base cost to the value of the farm on the owner’s death.
The Government may consider this sort of planning unacceptable which should be stopped, especially for the richest where values can be very high.
The farming community is in uproar because the Budget proposals involve inheritance tax having to be paid on a proportion of the value of the farm even though it may have been owned by the same family for generations and there may be no intention of selling the farm. The Owner’s successors may wish to continue the same business as before, and not have it decimated or reduced by inheritance tax.
What compromise could be found?
When the owner of scenic land dies there is already a separate exemption from inheritance tax, known as conditional exemption, which the deceased owner’s successors can claim if they give various undertakings largely to do with the management of the land. Then, if this conditional exemption is claimed, inheritance tax on the owner’s death is deferred until the land is sold or the undertakings are breached.
In those cases, broadly, the deferred inheritance tax becomes payable on the sale proceeds, or the value of the land when the undertakings are breached. When calculating this clawback charge the proceeds or value will not be reduced for inheritance tax purposes by agricultural property relief.
It seems to me that a similar form of conditional exemption could be introduced to replace the current Budget proposals. If such a new conditional exemption were to be claimed tax on the otherwise chargeable part of the value of the farm under the Budget proposals would be deferred, but the Government would know that the deferred tax will be collected on a future sale of the farm or if and when the undertakings are breached.
From the point of view of the landowner’s successors they will retain ownership of the whole farm and farming business indefinitely, with the deferred inheritance tax having to be paid only on sale or when undertakings are breached or withdrawn. This will be entirely under the successors’ control.
Little has been heard of the current conditional exemption over scenic land because not all land in the UK can qualify as scenic, and also because the widespread availability of 100% agricultural property relief means that it usually does not have to be considered. However, as discussed above, it could form the basis of a new conditional exemption over farms and farming businesses.
Would the Government consider a compromise solution along these lines?
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