How Rachel Reeves can fix farm tax, by experts who sparked the idea
From April next year all inherited agricultural assets worth more than £1 million, which were previously exempt, will have to pay inheritance tax at 20 per cent, in a bid to raise £520 million a year by 2029.
A new analysis by the Centre for the Analysis of Taxation (CenTax), which is credited with giving Rachel Reeves the idea for the tax reform, found that only 20 per cent of non-farming landowners would be affected by the changes, while 67 per cent of farmer-owners, 25 per cent of tenant farmers and 45 per cent of mixed tenure farmers would be hit.
The report says between 480 to 600 farm estates per year would face higher tax bills, with around 205 — 43 per cent of all impacted farm estates — potentially comprising 'small family farms' with an estate valued at less than £5 million.
A 'farm estate' is the total wealth of an individual who dies owning some farmland or other farm assets on which they claimed tax relief. The CenTax report highlights that 64 per cent of all 'farm estates' in the country belong to non-farming landowners.
The report's authors claim that 86 per cent of affected farm estates could pay their inheritance tax bill out of 'non-farm assets', leaving around 70 farm estates a 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 ten annual instalments.
The National Farmers' Union (NFU) says that the majority of medium-sized working farms would not be protected by a ten-year payment window because they 'don't earn enough money to pay the potential inheritance tax bill without selling off some of their land or business, which in turn makes the farm business unviable'.The average return of working farm businesses, which can be worth many millions in assets, is less than 1 per cent.
The CenTax report, funded by the Nuffield Foundation and Abrdn Financial Fairness Trust, lays out two options for 'better targeting the reform'.
One suggestion is for a 'minimum share rule' that would remove tax relief for passive investors in farmland and other business assets, which would fund an extension of 100 per cent relief for farmers and other business owners to £5 million per estate.
Alternatively, an 'upper limit on relief' is suggested that would cap relief at the first £10 million of any claim, funding an increase in the allowance for 100 per cent relief to £2 million per estate.
Andy Summers, director of CenTax and an associate professor at London School of Economics and Political Science, 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.'Tom Bradshaw, president of the NFU, 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.
'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.'
The NFU and the Country Land and Business Association (CLA) are proposing an alternative 'clawback' scheme to ministers, where a 40 per cent inheritance tax would be applied to assets if sold by a family successor within seven years of the owner's death.
It would mean those who continue to farm would not be hit with crippling inheritance tax bills, and those who decide to sell would have the cash in the bank and be able to pay.
A government spokesman 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 European Union and have appointed former NFU president Baroness Batters to advise on reforms to boost farmers' profits.'
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