Academics Urge Government to “Seriously Consider” Finessing Inheritance Tax Reforms to Protect Family Farm Businesses

The Tenant Farmers Association (TFA) has welcomed a report from the Centre for the Analysis of Taxation (CenTax) as an important contribution to the debate over the impact of the changes to Inheritance Tax reliefs for agricultural and other business property announced by the Chancellor of the Exchequer, in her October 2024 Budget.

Since the announced changes to inheritance tax reliefs, the TFA has argued consistently that they needed to be finessed rather than abandoned altogether. The TFA believes that the analysis set out in the CenTax report supports the approach the TFA has taken.

Whilst the TFA notes that the researchers have not gone as far as the TFA would have liked, nevertheless, the researchers do conclude that "…if it were possible to identify changes that could extend protection of family farms whilst still achieving the Government's other objectives (and also meeting its constraints), we think those would merit serious consideration."

The researchers agree with at least two of the proposed alterations promoted by the TFA to support family farms, firstly transferability of the combined 100% relief threshold for Agricultural and Business Property Relief between spouses and civil partners and an increase in the 100% relief threshold to £2 million. The researchers also looked at alternative thresholds including £1.5 million and £5 million.

The report also looked at transitional arrangements, including allowing the elderly the opportunity to claim exemption on assets transferred to the next generation within a shorter time frame than the required seven years. Whilst the researchers agreed these individuals are the most likely to be affected in the earliest years of the reform, the researchers did not endorse the introduction of a transitional regime. This was despite the fact that the report identified that over 80% of impacted estates belonged to those aged 75 and above and over half belonging to those aged 85 or over. These ratios are far higher than those within the wider population. The researchers recognised that this is in large part driven by the existing tax advice to hold onto farm and other business assets until death to claim full relief.

TFA Chief Executive, George Dunn, said “The argument made by the researchers for not supporting this transitional measure is purely based on the impact on the expected Exchequer revenue. However, there is a strong moral case that such a change in policy should be accompanied by reasonable transitional measures to allow those most impacted by the potential cliff edge that will be placed in front of them to alter their course and plan accordingly. That is why the TFA continues to argue for transitional arrangements for the very elderly, or for those who have been diagnosed with terminal illnesses”.

The TFA is also disappointed that the report did not consider the unintended consequences of the tax changes on the tenanted sector of agriculture with private landlords owning estates far in excess of the zero-rate threshold currently announced, or even those envisaged by the researchers and finding that they will have a much increased tax burden. Those estates are already making changes to their letting policies to mitigate their tax position and leaving them more able to address potential tax bills when they arise. This is leading to estates considering shorter lengths of term and lower levels of investment than they would otherwise have been contemplating.

“Fitting with wider Government policy, the TFA continues to make its long running argument that landlords letting property through secure tenancies under the Agricultural Holdings Act 1986 or tenancies of 10 years or more without fixed break clauses under the Agricultural Tenancies Act 1995, should be able to claim 100% relief from Inheritance Tax. In all other cases, landlords should be subject to the standard rate of Inheritance Tax. Although the researchers did not cover this aspect specifically, the change we propose is in line with their recommendation that serious consideration should be given to changes that could further support family farm businesses,” said Mr Dunn.

Finally, although beyond the scope of the CenTax report, the TFA advocates that instead of focusing on Inheritance Tax, the Government should be looking to either abolish or significantly curtail the availability of Capital Gains Tax Business Assets Rollover Relief.

“Rollover Relief encourages the wealthy to invest in land to avoid tax and gain access to a favourable Inheritance Tax position. In most cases, when a capital gain is generated, there will be cash within the system from which tax can be paid. That is unlike the situation on inheritance when fixed assets may need to be liquidated to pay tax causing issues for the financial stability of farm businesses and the continuance of large estates providing letting opportunities into the agricultural sector,” said Mr Dunn.