Reports suggest that the Labour Party could include major changes to inheritance tax (IHT) exemptions1 – including business and agricultural reliefs – in its manifesto. Sian Steele, head of Tax at professional services and wealth management firm Evelyn Partners, comments on the potential effect this could have on farms and small businesses.
IHT is one of the more controversial taxes in the UK and has been receiving increased attention in recent months amid speculation that the current Government will take steps to reduce it. But for years, the complexity of the rules and reliefs around IHT have sparked debate in political circles and the media.
Currently, to allow farms and other small firms to continue without major disruption to the business, on the death of an owner agricultural relief and business relief can apply to these assets. Where the criteria for these reliefs are met, agricultural land and businesses can be inherited tax free.
If these reliefs are abolished, the application of a top rate of 40% IHT would in many cases mean the business had to be sold on the death of the current owner to pay the tax bill. This would have significant implications for the employees and the stability of the business.
Very wealthy individuals will have other assets from which to pay IHT, so this would be a particular burden to those whose farm or business is their main asset and livelihood. The current legislation has been regarded as demonstrating sound commercial sense in allowing businesses to continue without the looming risk of a forced sale on death. Farming businesses would often become unviable if a substantial proportion has to be sold.
There are a number of downsides to a complete abolition of these reliefs. Reassurance that the farm or business has a long-term future, as given by these reliefs, allows for longer term projects such as sustainability and environmental measures. Breaking up farms and businesses into smaller shareholdings could impede efficiencies, and potentially impact food production, employment and their contribution to the wider economy.
An alternative policy option would be to consider strengthening the ‘clawback’ elements of the legislation. If the farm or business is inherited and then sold within a specific time period, a deferred IHT charge could then come into force.
These reliefs have previously attracted criticism, with the implication being that wealthy individuals may invest in farmland or small businesses purely to shield their wealth from IHT. However, a report commissioned by HMRC in 2017 noted views of taxpayers and advisers that IHT planning was primarily driven by a desire to keep businesses and farms intact on the death of the owner. A reduction in IHT liabilities was found to be a secondary concern.
Despite the current media reports, we have not yet seen any official announcements on these proposals. We expect that Labour policy will be clarified at the party’s annual conference, starting on 8 October, which would allow a more informed debate.
1 https://www.telegraph.co.uk/money/tax/inheritance/labour-plots-devastating-inheritance-tax-raid/
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