Over the last couple of weeks, the news has been dominated by a subject close to my heart, namely tax. Rather than the swingeing increases in national insurance contributions for employers, or the effects of fiscal drag, the news outlets have been stirring up more trouble than seemed possible over the impact of impending changes to inheritance tax legislation on farmers.
According to the National Union of Farmers (NFU), there are over 200,000 farms in the United Kingdom, and whilst the numbers are disputed, BBC Verify estimates that in a typical year only around 500 estates would be affected by the new legislation. Even so, it seems reasonable to assume that a fair number of these will only just tip over into paying tax, meaning that their liabilities may be quite modest.
An army of tractors
Farmers have a number of justifiable reasons to march on Parliament as a result of changes to tax and associated legislation that could have a devastating impact on their businesses. But in truth, inheritance tax is the least of their problems.
Far more farmers and their businesses, face financial difficulties as a result of an above inflation increase to the National Living Wage, increased sick leave costs, fiscal drag and arguably the biggest cost, namely the double whammy of employer’s NIC changes to rates and thresholds. These are the underlying reasons for the army of tractors descending on Downing Street.
As an accountant who advises farmers on a regular basis, I understand the difficulties faced by the industry but, judging by recent news stories, few have anything to do with taxation. The biggest gripe amongst farmers I deal with is the actions of supermarkets in squeezing margins to the limit, plus the effects of Brexit which has reduced grants and caused trading problems.
If you add to this an immigration strategy which prevents farmers from recruiting much-needed seasonal labour, the huge increases in the costs of fuel and fertilisers, largely as a result of Russia’s invasion of Ukraine, the final nail in the coffin was Inheritance Tax, which is why IT is the focus for many farmers.
Is Inheritance Tax (IT) the biggest issue?
The planned changes to IT are unlikely to affect many farmers for a number of reasons. In many cases, those that face the biggest hit will actually be individuals who are using farms as a tax-mitigation strategy rather than their stock in trade. This is especially true of Jeremy Clarkson and his Diddly Squat farm, which is 1,000 acres of prime agricultural land and worth circa £11 million. Mr Clarkson can hardly claim to be passing on a much-loved business that has been in the family for generations.
In truth, the legislation might well struggle to get through the House of Lords, where a significant number of those affected are in residence. The starting point for IT is £325,000 tax-free, which can be doubled up for married couples. The same applies to a £175,000 allowance if the family home is passed down the generations. Plus, there’s Agricultural Asset Relief allowance of £1m, which is doubled up for couples.
Other allowances
Additionally, farmers have a 50% lower IT tax rate of 20%, half of the normal rate, which can be paid in instalments over 10 years and it potentially, can be even better. Should the owner of a family farm pass on his/her assets to beneficiaries and can survive for seven years, the tax disappears completely. If, sadly, they don’t make the full seven years, there is a sliding scale that will reduce the IT charge.
The argument made by the NFU is that the changes will force the sales of inherited farms, largely because elderly patriarchs of family farms have only been given a few months’ notice of when the changes will be enacted and many will not live the 7 years necessary to pass on their farm to their son/daughter tax-free.
The example often quoted by Rachel Reeves is a 400-acre farm owned by a couple and worth £4m. Around £3m will be covered by allowances and reliefs, leaving an IT bill of £200,000 payable at a rate of £20,000 a year for 10 years. In Dear Rachel’s opinion, as this Is only 0.5% of the farms value, it is easily affordable.
However, what the Chancellor clearly doesn’t realise (or perhaps is choosing to ignore!), is that most farmers are only getting a miserly return of 0.5% on the value of their farm, so their children who inherit the farm, will have to use most of their net income to pay the tax, which will just not be feasible for most of them.
Accountant’s view
There is very little doubt that many genuine farmers with mid-sized businesses will face difficulties as a result of the IT changes, but far more are going to suffer due to other economic problems, especially low returns and difficulties in attracting workers.
Personally, I’ve always felt that the agricultural property relief was too generous as the main beneficiaries of the relief are large corporations, who historically have bought farms just to avoid tax, and under the new rules they still won’t pay any tax. I would therefore make the land holdings of corporations taxable, say at a rate of 5% of the value of the land per annum, which would also have the advantage of increasing the tax take each year with inflation.
I would also suggest to the Chancellor, that she should consider phasing in the changes for owner farmers over say, a 5-year period, to enable them to have sufficient time to set up family trusts and thus be able to pass on their farms to their children largely tax-free.
