The Unintended Consequences of Inheritance Tax Reform on UK Farms and Rural Properties
In the growing debate on possible reforms to Inheritance Tax (IHT), H&H Land & Estates Director, Tim Sedgewick highlights the profound impact IHT changes could have on all UK farms and estates, and the damage removal or amendment of Agricultural Property Relief (APR) and / or Business Property Relief (BPR) will inflict on farming, the agricultural industry, and the rural economy.
“In recent years, Inheritance Tax (IHT) has become a subject of intense debate within the UK, particularly in relation to how it impacts rural landowners and family-run farms. With the new Government turning to tax reform as a primary means of increasing revenues, attention is focusing increasingly on agricultural and business property reliefs (APR and BPR).
These reliefs provide essential tax exemptions for farmers and rural business owners, ensuring the continuity of multigenerational family farms and sustaining the UK’s agricultural landscape and rural economy. Attempts to reform or restrict these reliefs could have wide-ranging unintended consequences, not just for those directly involved but also for the wider UK economy.
Inheritance Tax
IHT is a levy on the estate (property, money, and possessions) of someone who has passed away, currently charged at 40% on the deceased’s net worth over £325,000.
This particularly impacts those with large assets such as land, property, or family-run businesses. A major increase in land prices over the last 20 years has seen the value of even smaller farms rise far beyond the IHT threshold. But for farm and land-owning families, the ability to pass on their property as a viable business to the next generation without facing prohibitive tax burdens is of paramount importance, and this is where the reliefs of APR and BPR become critical.
Agricultural Property Relief (APR)
APR allows for the transfer of qualifying agricultural property, including farmland, buildings, and livestock, at a reduced or even zero IHT rate. Specifically, APR can offer up to 100% relief on agricultural property that has been owned and farmed for at least two years. Importantly, APR applies only to the agricultural value of the property, meaning that any value above its ‘agricultural worth’ may still be liable for IHT.
APR is a lifeline for family-run farms. Without this relief, many farming families would face huge tax bills following the death of a family member, potentially forcing the sale of the farm just to cover the IHT charge. Farms, unlike many other types of businesses, are often ‘asset rich but cash poor’, meaning that while the land may be valuable on paper, liquidating those assets to pay IHT would be disastrous for the family and for the future sustainability of the farm.
Business Property Relief (BPR)
Like APR, BPR can provide up to 100% relief on the value of a business or interest in a business, but its scope is broader, potentially encompassing non-agricultural business operations such as diversified business activities including farm shops, renewable energy enterprises, or equestrian facilities, for example, which generate essential revenue for the farm business.
Attempts at Reform and Potential Consequences
Critics argue that these reliefs are overly generous and represent an unjustifiable tax break for wealthy landowners, but such arguments fail to consider the unique nature of family farms and rural businesses. Unlike other forms of property, farmland is a productive asset that generates food, conserves the environment, and contributes to rural economies with a variety of supply chains and employment.
Without these reliefs, families would be more likely to be forced to sell off part or all of their farm to meet IHT obligations. This could fragment the rural landscape, reducing the productive use of agricultural land. Family-run farms are often seen as the custodians of the land, invested not just in profit, but in sustainable farming practices and the health of the rural environment.
A reduction in the number of family farms would also have consequences for the UK’s food security, undermining the diversity and resilience of the UK’s already declining home-grown food supply.
Family farms are often at the heart of rural communities, supporting local jobs and contributing to social cohesion, and the risk of heightened tax obligations would almost certainly drive down farmland values which play a crucial role in underpinning the wealth of rural communities, leading to lower investment and economic stagnation.
The ripple effect of undermining such a fundamental, staple industry would extend far beyond the farms and faming families themselves, spreading the damage throughout the rural economy to every business that supports, supplies and serves the agricultural sector.
So, while it is easy for some to view APR and BPR as tax breaks for the wealthy, the reality is far more complex. These reliefs are fundamental to the survival of family farms, which play a critical role in maintaining the UK’s agricultural landscape and rural economy for future generations.