Embargoed 0.01 Thurs 14 Aug
A new report by researchers at the Centre for the Analysis of Taxation (CenTax) [1] provides the first independent, data-driven assessment of how the Government’s Inheritance Tax (IHT) reform [2] will affect farm estates.
Using detailed HMRC Inheritance Tax data, the report estimates that around 30% of farm estates [3] would be impacted by the reform, of which around 200 estates per year potentially comprise family farms valued at less than £5 million.
The analysis also finds that:
- Over 80% of the revenue from farm estates comes from the one third (34%) of impacted estates worth over £5 million. Less than 1% of additional tax comes from the one in ten (11%) impacted farm estates valued at less than £2 million.
- Landowners are less likely to be impacted by the reform than working farmers, representing 64% of all farm estates but 42% of impacted farm estates. Owner-farmers represent 17% of all farm estates but 37% of impacted farm estates.
Addressing concerns that farms would need to be sold to pay the tax, the report finds that:
- Almost half (49%) of all impacted farm estates would see a tax increase of less than 5 percentage points (pp). All of the 25 farm estates per year facing an increase larger than 15pp are valued at over £7.5 million.
- 86% of impacted farm estates could pay their entire IHT bill out of non-farm assets, leaving around 70 farm estates per year that could not. Of these, around 40 farm estates would face a residual bill greater than 20% of the farm’s income (after tax and depreciation), if paid in ten-year annual instalments.
The researchers suggest two options for better targeting the reform whilst still raising at least as much revenue overall:
- A ‘minimum share rule’ that would remove relief for passive investors in farmland and other business assets, funding an extension of 100% relief for farmers and other business owners to £5 million per estate.
- Alternatively, an ‘upper limit on relief’ that would cap relief at the first £10 million of claim, funding an increase in the allowance for 100% relief to £2 million per estate.
Dr Andy Summers, Director of the Centre for Analysis of Taxation (CenTax) and Associate Professor at London School of Economics & Political Science (LSE) said:
“Our analysis shows that the Government’s reform largely protects family farms whilst limiting claims by the wealthiest estates. But the relief could be better targeted to reduce its use for tax planning and further extend protection for businesses, including farms.”
ENDS
Notes to Editors:
1. The Centre for the Analysis of Taxation (CenTax) is an independent research centre dedicated to improving public understanding of tax policy and helping to design a better tax system. This research was funded by the Nuffield Foundation and abrdn Financial Fairness Trust.
2. The reform, announced in the Autumn Budget 2024 and due to take effect in April 2026, will limit 100% tax relief on agricultural and business property to the first £1 million of qualifying assets. Above this threshold, relief will be reduced to 50%, resulting in an effective tax rate up to 20%.
3. Our analysis focuses on farm estates. A farm estate is not the same as a farm. It means the total net wealth of an individual who died owning some farmland or other farm assets on which they claimed relief. This definition encompasses working farmers (including tenant farmers), but also investors in farmland. A farm could be split across multiple farm estates, or a farm estate could own multiple farms.
4. The full report, The Impact of Changes to Inheritance Tax on Farm Estates, authored by Arun Advani, Sebastian Gazmuri-Barker, Sanaya Mahajan, and Andy Summers, is published by CenTax and is available here.
5. This work contains statistical data from HM Revenue and Customs (HMRC) which are Crown Copyright. The research data sets used may not exactly reproduce HMRC aggregates. The use of HMRC statistical data in this work does not imply the endorsement of HMRC in relation to the interpretation or analysis of the information.
