Labour is contemplating a significant overhaul of the inheritance tax system, a move that could have far-reaching consequences for farmers and family-owned businesses. Under consideration is the elimination of two long-standing exemptions: agricultural property relief and business property relief. Currently, these exemptions shield farms and businesses from the hefty 40% inheritance tax imposed on estates, allowing them to be passed down within families without incurring the steep levy.
This potential overhaul is part of a broader initiative by the Labour Party aimed at closing tax loopholes, with the hope of generating up to £4 billion in additional revenue, as reported by The Times. However, the specifics of Labour’s proposal remain unclear. It is uncertain whether they intend to completely eliminate these reliefs or simply reform them to prevent their misuse by investors who own agricultural land without being full-time farmers.
Presently, the rules grant a full 100% exemption from inheritance tax for agricultural property, while business property relief safeguards the intergenerational transfer of family businesses. Additionally, it extends exemptions to certain Alternative Investment Market (AIM) shares, offering a valuable tax planning tool for individuals with disposable income. This divergence in taxation contributes to the phenomenon where wealthier individuals, who often possess a more diversified asset portfolio, end up paying a lower effective rate of inheritance tax compared to middle-class families who primarily hold their wealth in non-protected family homes.
Experts have expressed concerns that a complete elimination of these exemptions could force family farms and businesses to be sold or divided in order to meet their inheritance tax obligations. Meanwhile, there are rumors that the Conservative Party may be contemplating either abolishing inheritance tax entirely or increasing the tax-free allowances in an attempt to gain an advantage in future elections, as they face stiff competition from Labour in the polls.
The Telegraph, in collaboration with over 50 Conservative Members of Parliament, is actively advocating for the removal of inheritance tax altogether. Agricultural property relief, which allows farmers and investors to pass on land without incurring death duties, currently saves approximately £1 billion in tax revenue annually, according to HM Revenue and Customs data. Similarly, business relief permits families to claim tax relief when inheriting business assets or shares in a company.
In the 2020-21 fiscal year, entrepreneurs, farmers, and investors managed to shield £3.2 billion from inheritance taxes through these exemptions, making them some of the most valuable inheritance tax reliefs available. Sean McCann of NFU Mutual, a financial advice firm, warns that scrapping agricultural property relief could have dire consequences for traditional family farms, as it enables them to make long-term investments with confidence in the sustainability of their operations for future generations. The removal of business property relief could also dissuade business owners from passing on their enterprises, potentially leading to increased borrowing by the next generation to cover the tax burden instead of investing in growth and job creation.
Furthermore, eliminating business property relief could adversely affect investors holding shares in unlisted companies, preventing them from enjoying 100% inheritance tax relief on their investments and potentially causing a sell-off of AIM shares. Labour is also reportedly considering the removal of business asset disposal relief, which currently offers reduced taxation rates for individuals who own more than 5% of a company when they sell their stake.
While Labour has not officially announced these proposed tax changes, it is speculated that they may reveal them shortly before an election campaign as a means of financing pre-election giveaways. Rachael Griffin of investment firm Quilter noted that the idea of eliminating agricultural and business property reliefs has been discussed by various think tanks in recent years, suggesting that the Conservatives might also consider such measures.
Proponents argue that these changes would primarily impact the wealthy, whose estates are more likely to comprise farmland, businesses, and substantial investments. However, it’s essential to acknowledge that both agricultural and business property relief serve a vital role in preserving the continuity of farms and businesses as they are passed down through generations, as recognized by the now-disbanded Office of Tax Simplification in its 2018 report on inheritance tax.