Central Association of Agricultural Valuers says government has missed the mark with its calculations
Up to 75,000 individual farm business owners are likely to be affected by the government’s changes to inheritance tax (IHT) over the coming generation – a figure more than five times the government’s prediction.
These sobering new figures have been put forward by the Central Association of Agricultural Valuers (CAAV), which argues that while the government’s data may come from correct answers to the questions it asked, by basing them on agricultural property relief (APR) only, it has ”missed large parts of farming.”
“Even allowing for almost any plausible margin of error, it is reasonable for large numbers of farmers to expect to be adversely affected,” said Jeremy Moody, secretary and adviser to the CAAV. ”More widely, privately owned businesses – accounting for 30 per cent of the UK economy – face the same changes to business property relief (BPR) and will also be affected.”
The government claims that only 500 farmers a year will be affected by the changes to APR and BPR, numbers based on data from HMRC, which reports 1,727 APR claims in 2021/22. “But the government’s analysis has not taken proper account of the interaction with other reliefs, notably BPR and spouse relief, or how farm businesses work,” Moody contended.
Explaining the CAAV’s position further, Moody said that currently, APR applies to land and buildings – not business assets like livestock, machinery, and commodities in store – and that under the new rules these assets will fall within the IHT calculation.
In addition, he said HMRC’s figures show that 860 farms claimed for both APR and BPR, while the new proposals will amalgamate these with an overall cap of £1mn relief, and 20 per cent tax charged thereafter.
There are 70,000 farm businesses in the UK over 125 acres, of which 40,000 are over 250 acres, explained Moody. “That 70,000 is potentially a proxy for the land area that on its own could take a value above £1mn before considering any farmhouse or other business assets.”
From those figures, both company owners and tenant farmers just need BPR, leaving around 60,000 landowners above the £1mn threshold – although CAAV says it should be remembered that tenant farmers may still need some APR claims.
What about other assets?
Defra’s report on farming balance sheets for 2022/23 shows an average of £668,000 of non-land assets – like machinery etc - which would fall into BPR, CAAV says. On top of this are many diversified activities interwoven with the farming business. “These, too, fall within BPR, which substantially increases the number exposed to the new tax liability,” said Moody.
Of course, for IHT calculations, business liabilities like loans must be deducted. “Defra puts average liabilities of £294,000, leaving an average net worth of £2.2m.” But the government’s calculations that only those married couples with assets worth £3mn or more will be affected require a very specific set of circumstances, which is both unrealistic and unreasonable, he argued.
Another important consideration is spouse relief, according to CAAV. Currently, assets can pass between spouses tax free, as can the nil-rate band of £325,000 and, where available, the £175,000 residential nil rate band, to be used on the second death. “But the £1mn of full relief is not transferable between spouses, and given the complexities of farm accommodation and income, spouses may still have to leave assets to each other, bringing even more assets above the joint APR / BPR cap.”
Overall, Moody calculates that around 75,000 taxpayers will be affected by the changes. “Over a 30-year generation, that would equate to some 2,500 a year rather than the government’s estimate of 500.”
And inflation will only increase this number as years go by, he added. “The nil-rate band has been frozen since 2009 and will remain so until 2030,” he said. “Since 2009 it has lost 36 per cent of its real value. Projected over the next 15 years, £1mn would have the same value as £640,000 now. Even by April 2026 it will be worth £966,000. This is not a policy that has been properly thought through.”
