Recent changes to the way that Inheritance Tax works have prompted thousands of irate farmers to descend upon Westminster. But what exactly are the changes, and why are they so problematic? Are there any good ways to get around them?
Overview of the Recent Inheritance Tax Reforms
In the October Budget, Rachel Reeves made changes to two kinds of Inheritance Tax relief. These are Agricultural Property Relief (APR), and Business Property Relief (BPR). The former refers to farmland, while the latter refers to business assets (which, in the case of farming, includes machinery, vehicles, and other things).
The changes mean that, after the first million pounds, inheritors will have to pay inheritance tax on these assets (albeit at half the rate paid by everyone else in the country). This amounts to a tax rate of 20% on everything over the threshold. Farmers have a decade to pay this.
Financial Implications for Farming Families
Those not involved in farming might consider this only fair. However, there are a few things to note. Farming is an asset-rich, but cash-poor industry. A farmer sitting on a £2 million estate might use it to scrape by, on less than the minimum wage. Faced with a £200,000 tax bill, farmers might be forced to sell the farm, or borrow.
It should be said that even farms that actually can pay this will eventually face another tax bill after the next generation inherits, and then another. While there is some disagreement over exactly how many farmers are going to be affected, it is reasonable to suggest that, over the long term, this model will utterly change the business model for smaller family farms – and even pose an existential threat.
Legal Considerations and Planning Strategies
These changes are relatively new, but already a number of creative ways to get around them have been proposed. These include the suggestion that farmers marry their mothers-in-law in order to take advantage of the spousal exemption.
The solution that is appropriate in your circumstances will depend on the size of your farm, and your family arrangements. Consulting with a family law solicitor will allow you to restructure your assets and come up with a succession plan that is tax-efficient, and yet compliant with the new rules.
Industry Response and Concerns
The industry has reacted to these changes with a mixture of dismay and exasperation. According to the National Farmer’s Union, around 70,000 farms will be affected by the changes. However, the Treasury, and the Chancellor, suggest that this is an overestimate – since it’s based on the total number of farms whose value exceeds the threshold. Many of these farms will be able to get around the tax through extra relief offered via marriage.
The government has shown no sign of backing down following large protests in the capital, which suggests that further escalation could result. It is possible that the food supply will be affected as a result of widespread strike action by farmers.
