{"id":73232,"date":"2025-08-16T18:03:10","date_gmt":"2025-08-16T18:03:10","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/73232\/"},"modified":"2025-08-16T18:03:10","modified_gmt":"2025-08-16T18:03:10","slug":"a-fair-solution-to-inheritance-tax-on-farms-and-small-businesses","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/73232\/","title":{"rendered":"A fair solution to inheritance tax on farms and small businesses"},"content":{"rendered":"

There has been a huge amount of controversy over the inheritance tax changes in last year\u2019s Budget. They raised \u00a3500m, but hit some small farms and small businesses unfairly \u2013 whilst not stopping much existing inheritance tax avoidance. There\u2019s a new proposal from CenTax<\/a> which seems to do the impossible: protect small farms and businesses, counter tax avoidance more effectively, and double the yield to \u00a31bn. <\/p>\n

CenTax are proposing a \u201cminimum share rule\u201d. Where a farm\/business forms at least 60% of an estate, there would be full relief from inheritance tax up to \u00a35m per person (so \u00a310m for a married couple). For \u00a35m-10m per person there would be 50% relief. After \u00a310m, no relief.<\/p>\n

I\u2019m convinced this proposal would be fairer for small farms and businesses, tougher on avoidance and raise more tax.<\/p>\n

Inheritance tax \u2013 the background<\/p>\n

If someone dies then their estate1<\/a> pays inheritance tax (IHT) at 40% on all their assets over the \u00a3325k \u201cnil rate band<\/a>\u201d (NRB).2<\/a> A married couple automatically share their nil rate bands, so only marital assets over \u00a3650k are taxed.<\/p>\n

Transfers to spouses are usually completely exempt from inheritance tax. So, for a married couple, in most cases there\u2019s only inheritance tax when the second spouse dies.<\/p>\n

The Cameron government introduced an unnecessarily complicated additional \u201cresidence nil rate band\u201d (RNRB) where the main residence is passed to children. This is \u00a3175k per person, and again automatically shared between married couples. So for most married couples, only marital assets over \u00a31m are taxed. The RNRB starts to be withdrawn (\u201ctapers\u201d) for assets over \u00a32m (with planning, a married couple can keep the RNRB with joint assets of over \u00a32m3<\/a>).<\/p>\n

Before the Budget<\/p>\n

Before the Autumn 2024 Budget<\/a>, private businesses and farms were often completely exempt from inheritance tax (IHT).<\/p>\n

Agricultural property relief<\/a> (APR) removed the IHT charge on the agricultural value of farmland, farm buildings and usually most<\/a> of the farmhouse. <\/p>\n

Business relief<\/a> (BR) removed the IHT charge on businesses \u2013 including farm businesses and farm assets such as machinery and livestock. <\/p>\n

In practice, qualifying APR\/BR assets were entirely exempt with no cash cap. This protected small farms and small businesses. However it went further than that:<\/p>\n

The exemptions had no limit. What made sense for a policy perspective for a small farm or family business doesn\u2019t really make sense for a \u00a37bn business<\/a> \u2013 but the exemption covered it just the same.<\/p>\n

The exemption doesn\u2019t apply to shares in listed\/quoted companies, for the very good reason that you can easily fund the tax by selling the shares in the market. But shares in alternative markets like AIM aren\u2019t considered \u201cquoted\u201d for this purpose, even though you can easily fund the tax in precisely the same way. So there\u2019s a large market in AIM portfolios designed solely to save inheritance tax<\/a>. This has no public benefit \u2013 it reduces tax take, distorts investment, and artificially inflates AIM valuations (hence reducing yield). <\/p>\n

The Budget 2024 changes<\/p>\n

The Budget put a combined cap<\/a> of \u00a31m per person on agricultural property relief and business relief. Up to that cap, there was still a complete exemption from inheritance tax (except for AIM shares).<\/p>\n

Above the cap, relief was cut to 50%\u2009 \u2013 \u2009so the marginal IHT rate on qualifying farm\/business assets beyond the cap became 20%, not 40%.<\/p>\n

That sits on top of the standard IHT thresholds<\/a>: the \u00a3325k nil-rate band (NRB), the \u00a3175k residence nil-rate band where a home passes to direct descendants, and the usual spouse exemption.<\/p>\n

The Budget changes apply from April 2026 and raise raises \u00a3500m<\/a> per year by 2029\/30 (more in earlier years).<\/p>\n

Why most farms and small businesses wouldn\u2019t be taxed\u2026<\/p>\n

The upshot for farmers and owners of small businesses:<\/p>\n

For a single farmer who has no material assets other than his or her farm and farmhouse, and plans to leave everything to their children, the new APR\/BR cap plus the nil rate band plus the residence nil rate band comes to a maximum of \u00a32m.4<\/a><\/p>\n

For a married couple who plan to leave everything to each other and then their children, the new cap plus nil rate band plus residence nil rate band comes to a maximum of \u00a34m with some basic planning.5<\/a><\/p>\n

For farms\/businesses larger than this, the answer in principle is to gift property above the \u00a32-4m limit. Provided they live for seven years<\/a>, the gift will be entirely outside inheritance tax and, if the owner\/farmer is still relatively young (say no older than 70) it will be relatively inexpensive to insure against the risk they died early. <\/p>\n

\u2026 and why some farms and small businesses would<\/p>\n

In practice that \u00a34m figure may not be achieved. Some farmers are unmarried; some married farmers\u2019 spouses aren\u2019t involved in the business.<\/p>\n

And the \u201cgifting plus insurance\u201d strategy doesn\u2019t work for everyone.<\/p>\n

An owner\/farmer may be elderly, and not expected to live for seven years (so gifting won\u2019t work and insurance is unavailable or expensive). This is why the Office for Budgetary Responsibility costings show the IHT changes yielding the most revenue in the first few years, from the \u201ctoo old to gift\u201d cohort. After that point, gifting\/planning is expected to reduce revenues.6<\/a><\/p>\n

Many small farmers have no material income or assets other than their farm, and expect their \u201cretirement\u201d to be funded through farming income. So it won\u2019t be always be easy for them to make a significant gift to their children (and a gift has to be real<\/a> to count as a gift for IHT purposes).<\/p>\n

All of this means that the consequence of the Budget changes are more nuanced than most media coverage (on both sides) suggests:<\/p>\n

Only a few hundred small farm estates will end up paying significant amounts of inheritance tax. The CenTax report<\/a> has more data and details on this.7<\/a><\/p>\n

Other farms will spend time\/money putting planning in place so they don\u2019t pay significant amounts of tax. <\/p>\n

This will be a source of worry and stress for many people, even if their estates don\u2019t end up paying tax.<\/p>\n

Why should we care about someone with \u00a35m of assets?<\/p>\n

An obvious response to the above is: everyone else pays inheritance tax. Why should farms and small businesses be any different, particularly if they own assets worth millions of pounds?<\/p>\n

It\u2019s helpful to compare the position of someone inheriting \u00a35m of cash\/securities and someone inheriting a \u00a35m farm or small business. <\/p>\n

If I was lucky enough to inherit \u00a35m of cash or securities, I\u2019d receive \u00a33m after inheritance tax.8<\/a> I could invest that in a fund tracking worldwide equities<\/a>9<\/a> and expect to be able to maintain the value of the \u00a33m (after inflation)<\/a> whilst taking out around \u00a3120,000 each year. Or someone with a higher risk tolerance might even keep the \u00a35m portfolio, and borrow \u00a32m secured on the portfolio<\/a> \u2013 I might expect the long term return on the portfolio (7%) to exceed the cost of the borrowing (5%).10<\/a><\/p>\n

This doesn\u2019t seem a particularly harsh outcome. After all, I\u2019d have paid at least 40% tax (or more) if I earned \u00a35m \u2013 it\u2019s not clear why there should be less tax when I\u2019m getting the money for nothing. And most people could live very comfortably for the rest of their lives on \u00a3120,000 of passive income.<\/p>\n

Now let\u2019s look at what happens if I inherit a \u00a35m farm or small business, and ignore the house and other assets for now. If my parents put simple planning in place, \u00a32m will be fully covered by APR\/BR, and the rest benefit from 50% APR\/BR. Meaning the tax bill is \u00a3600,000 \u2013 20% of \u00a33m.<\/p>\n

I probably can\u2019t sell \u00a3600,000 worth of the farm\/business to pay this. It\u2019s hard to sell part of a small business, and farms cease to be viable below a certain size.<\/p>\n

Nor can I easily fund the tax by borrowing. HMRC lets me pay the inheritance tax over ten years<\/a> and interest free<\/a> \u2013 i.e. \u00a360,000 per year. That means I need the business to generate a 1.2% return to cover the cost of the tax. <\/p>\n

Many small businesses would be able to do this \u2013 but many small farms will not. The profit from farming often represents a very small percentage of the value of the land. I\u2019ve spoken to farmers who own land worth \u00a35m whose net income is around \u00a350,000. That seems economically contradictory, even impossible, but it\u2019s nevertheless the case.11<\/a><\/p>\n

The result would be that the heirs would be forced to sell the farm to pay the tax. The farm as a unit would be unviable. That is undesirable \u2013 not just for the family directly affected, but for the local community.<\/p>\n

The problems with the Budget changes<\/p>\n

This illustrates an obvious problem with the Budget changes: in a small but significant number of cases, small farms bear a cost they cannot afford, and will end up being broken up.<\/p>\n

There\u2019s a second problem: the changes don\u2019t remove the tax avoidance opportunities of BR\/APR. I can acquire (for example) woodland<\/a> purely to avoid inheritance tax, and it\u2019s still completely effective for the first \u00a31m, and worthwhile (50% relief, so an effective 20% inheritance tax rate) for the rest.<\/p>\n

The question is how we fix this.<\/p>\n

Our proposal: clawback<\/p>\n

Last year we spoke extensively to farmers and farm tax advisers, and proposed a solution<\/a> \u2013 \u201cclawback\u201c.<\/p>\n

We suggested keeping full APR\/BR for genuine farm succession but clawing it back if heirs sell the farm within a long, tapering period. That would make farmland useless as a bolt\u2011on IHT shelter: if your children cash out, the tax is reinstated.12<\/a><\/p>\n

Since we were only seeking to protect small farms, we suggested there should be a \u00a320m ceiling on the exemption.<\/p>\n

This had two effects:<\/p>\n

Someone inheriting a small farm and continuing to farm it (or lease it to a tenant farmer) would continue to benefit from a complete inheritance tax exemption<\/p>\n

Someone inheriting farmland\/woodland acquired for inheritance tax planning purposes would likely want or need to sell it (given the low yield); but they then wouldn\u2019t benefit from the inheritance tax exemption.<\/p>\n

The proposal therefore was tougher on tax avoidance than the Budget proposal, whilst also protecting small farms.<\/p>\n

Clawback was widely supported by farmers and the National Farmers\u2019 Union<\/a>. However it has failed to achieve any traction with Government. I believe the main reason is that there is simply no data that lets HMRC or HM Treasury model the revenue impact of clawback. There may also have been a concern that it wasn\u2019t possible to design and implement clawback by April 2026.<\/p>\n

It therefore doesn\u2019t look like there is any realistic possibility of clawback being implemented.<\/p>\n

A better proposal: CenTax\u2019s \u201cminimum share rule\u201d<\/p>\n

CenTax have published a paper<\/a> proposing a minimum share rule (MSR). <\/p>\n

The idea is that, to get agricultural property relief or business relief , a minimum share of the estate must be made up of qualifying farm\/business assets. If farming\/business is what you do, you hold more than the minimum share, and get relief up to a generous allowance. If you\u2019re a wealthy household that bought some farmland\/woodland to save inheritance tax, you don\u2019t.<\/p>\n

CenTax present various possible scenarios, but the one I think is most workable is as follows:<\/p>\n

A minimum share set at 60%. All the small farmers I\u2019ve spoken to would easily clear this hurdle \u2013 their farmland, business and farmhouse<\/a> amount to around 90% of their overall assets. Most small businesses would too.13<\/a><\/p>\n

If the value of the farm\/business is at or over the minimum share, APR\/BR provide a complete exemption up to a \u00a35m combined APR\/BR allowance. This is per-person, so a married couple should benefit from a combined \u00a310m allowance. The allowance should transfer between spouses, in the same way as the nil rate band<\/a> and residence nil rate bands<\/a> currently do. Above the \u00a35m per-person allowance, there would be 50% APR\/BR relief, i.e. a 20% effective inheritance tax rate.<\/p>\n

If the value of the farm\/business is below the minimum share, APR\/BR is not available, so the full 40% IHT rate applies.14<\/a><\/p>\n

There would then be a \u00a310m (per person) upper limit to any APR\/BR relief. After that, inheritance tax would apply at the usual 40% rate.<\/p>\n

I believe this is a better solution than clawback. <\/p>\n

It protects small farms just as effectively than clawback (but without the complexity of worrying that subsequent unplanned sales of land\/assets could trigger a large IHT charge).<\/p>\n

It counters artificial use of APR\/BR for avoidance purposes more effectively than clawback, because it\u2019s not reliant on a subsequent event the timing of which would be uncertain. And it does this much more effectively than the Government\u2019s proposal, because tax planners no longer get a \u00a31m exemption to play with.<\/p>\n

It should be possible to implement by April 2026, although some of the detail (and anti-avoidance) would need careful thought.<\/p>\n

Most importantly from HM Treasury\u2019s perspective, existing IHT data can be used to estimate the revenue impact. Here\u2019s CenTax\u2019s figures:<\/p>\n

\"Adjustment<\/p>\n

My favoured scenario is in the bottom right \u2013 the central estimate is that this doubles the revenue from the Government\u2019s IHT reform. So instead of raising \u00a3500m<\/a> by 2029\/30, it raises \u00a31bn.<\/p>\n

I won\u2019t try to reproduce CenTax\u2019s full technical design here \u2013 their paper isn\u2019t short<\/a> \u2013 but the policy principle is a simple one: relief should reflect how far the estate is genuinely a farm business or small business. That\u2019s hard to game, easy to administer off the existing data model, and it avoids pushing viable farms into \u201csell land to pay the tax\u201d decisions that the Budget proposal inevitably creates.<\/p>\n

I think it\u2019s a very good idea \u2013 I hope Government and representatives of farmers and small businesses give it careful consideration.<\/p>\n

Thanks to the farmers, advisers and policy folk who commented on a draft of this note. Any errors are mine.<\/p>\n","protected":false},"excerpt":{"rendered":"There has been a huge amount of controversy over the inheritance tax changes in last year\u2019s Budget. They…\n","protected":false},"author":2,"featured_media":73233,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[64,63,99,186,184,185],"class_list":{"0":"post-73232","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-au","9":"tag-australia","10":"tag-business","11":"tag-finance","12":"tag-personal-finance","13":"tag-personalfinance"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/73232","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=73232"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/73232\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/73233"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=73232"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=73232"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=73232"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}