Study looks in detail at impact of controversial inheritance tax changes
A major new report has claimed the government’s inheritance tax (IHT) reforms largely protect family farms – but argued that relief could be better targeted to protect working farms.
The report by the Centre for Analysis of Taxation (CenTax), which claims to provide the first independent, data-driven assessment of how the government’s inheritance tax reform will affect farm estates, estimates that around 30 per cent of farm estates would be impacted by the new rules, of which around 200 estates per year potentially comprise family farms valued at less than £5 million.
It found that over 80 per cent of the revenue from farm estates comes from the one-third (34 per cent) of impacted estates worth over £5mn. Less than one per cent of additional tax comes from the one in 10 (11%) impacted farm estates valued at less than £2mn.
Landowners are less likely to be impacted by the reform than working farmers, the report states. Owner-farmers represent 17 per cent of all farm estates but 37 per cent of impacted farm estates.
Addressing concerns that farms would need to be sold to pay the tax, the report found that almost half (49 per cent) of all impacted farm estates would see a tax increase of less than five percentage points. All of the 25 farm estates per year facing an increase larger than 15 percentage points are valued at over £7.5mn.
Some 86 per cent of impacted farm estates could pay their entire IHT bill out of non-farm assets, leaving around 70 farm estates per year that could not. Of these, around 40 farm estates would face a residual bill greater than 20 per cent of the farm’s income, if paid in 10-year annual instalments.
Improving the system
The researchers suggested two options for better targeting the reform while still raising at least as much revenue overall.
Firstly, its proposed a ‘minimum share rule’ that would remove relief for passive investors in farmland and other business assets, funding an extension of 100 per cent relief for farmers and other business owners to £5mn per estate.
Alternatively, an ‘upper limit on relief’ would cap relief at the first £10mn of claim, funding an increase in the allowance for 100 per cent relief to £2mn per estate.
Dr Andy Summers, director of CenTax and associate professor at the London School of Economics & Political Science (LSE) said: “Our analysis shows that the government’s reform largely protects family farms whilst limiting claims by the wealthiest estates. But the relief could be better targeted to reduce its use for tax planning and further extend protection for businesses, including farms.”
’Opportunity for fresh conversations’
Since last year’s Budget, the NFU has raised its members’ concerns that the current policy will not achieve its intentions of removing the incentive to shelter wealth in farmland, protecting family farms or generating as much revenue as it should. The NFU has also stressed the burden this tax places on elderly farmers within the community.
NFU president Tom Bradshaw said: “We welcome this detailed report by CenTax which recognises that working farms will be disproportionately affected by this tax. This is not a fair and balanced approach to reform and does little to counter those who seek to shelter wealth from inheritance tax by simply investing in farmland.
“There are interesting adjustments within the report that appear to mitigate the impacts on the most vulnerable in our community and enable farms to invest in the future of food production with greater confidence.
“We think this new independent analysis presents a positive and timely opportunity ahead of the Finance Bill for fresh conversations with government and officials that would allow us all to work together to address issues of fairness and affordability within the proposals. The NFU urges government to grasp this opportunity.”
