Rachel Reeves' first budget contained
over £31 billion of tax increases. Less than 1% of that came from
bringing some agricultural property into inheritance tax. And yet
it is the higher tax on farmers that has dominated the news
headlines.
In this Comment we explain what the
inheritance tax change is and what can be said about the number
of farms that will be affected. We argue that, if the government
is going to have an inheritance tax, it should be applied to all
assets. And if the government wants to encourage food production,
or some other specific use of land, it should support this
directly. Inheritance tax relief is poorly
targeted.
David Sturrock, Senior
Research Economist at the Institute for Fiscal Studies,
said:
"If we have an inheritance tax it
should apply equally across all types of assets, unless there are
compelling reasons to deviate from that. Inheritance tax relief
for agricultural and business assets favours those whose wealth
is held in these forms rather than others. It also provides a tax
incentive for agricultural land to be used by the wealthy as a
way to avoid inheritance tax. That is unfair, inefficient and
creates economic costs.
Those objecting to the change claim
that paying IHT will have detrimental effects on food production
or the environment. But if government wishes to promote food
production or certain uses of land, there are much better ways of
doing so than through an inheritance tax break. It is also
objected, as a matter of principle, that this could result in
families having to sell up and move on from farms that have been
in the same family for generations. That is an argument against
inheritance tax in general – it can have the same effect on
family homes, for example – rather than a strong case for
protecting certain forms of assets
specifically.
The exact design of the tax change is
important, and there are two mitigations which the government
could consider. There is a good case for making unused portions
of the new £1 million allowance inheritable by a spouse or civil
partner, as happens for the main inheritance tax allowances. In
addition, current farm owners passing away in the next seven
years (but after the new regime comes into force in April 2026)
will not have had the opportunity to avoid inheritance tax by
making lifetime gifts. If the government wished to give current
farm owners the same opportunity to avoid inheritance tax as
owners of other assets, it could, for example, make lifetime
gifts of agricultural property made before a certain future date
inheritance tax free, regardless of the timing of the
death.”
Read the briefing
here.
