inheritance tax on farms, explained – Channel 4 News

Thousands of farmers descended on London this week, demanding that the government change plans to introduce an inheritance tax on some assets.

FactCheck takes a look.

What is the government’s new inheritance tax policy for farms?

As it stands, farms are almost entirely exempt from inheritance tax – thanks to two policies called Agricultural Property Relief (APR) and Business Property Relief (BPR).

Farmers have been able to use a combination of these reliefs to pass on agricultural land and related business assets, tax-free.

But below new plans announced in the Budget, this relief together will be covered in one million pounds – so farm land and farm assets over the value that will be subject to inheritance tax at 20 percent.

So what will this look like in practice?

Let’s say you own a farm worth £2.2 million – roughly the average net worth of a farm in the UK, according to figures from Defra.

If you are single, the State Treasury you will be able to send up to £1.5 million of this to your children or grandchildren tax free. It is a one million pound allowance for farmers, plus the normal tax exemption that everyone has, which is worth up to £500,000.

£2.2 million minus £1.5 million in tax relief leaves £700,000 that can be taxed.

In the new government policy, that £ 700,000 will be taxed at 20 percent – instead of 40 percent as non-farmers pay.

This leaves a theoretical tax bill of £140,000. Your child or children can pay installments over ten years, interest-free. That’s better than the unpaid inheritance tax bill the farmer has, which carries an interest rate of 7 percent.

So an annual tax bill of £14,000 over ten years, in our hypothetical example.

Now imagine that you are part of a married couple and pass on a farm for the same price – £2.2m.

At State Treasury “two people who jointly own a farm will be able to pass on land and property valued at up to £3 million to their children or grandchildren tax free”. This is because you and your partner can get a £1.5m tax break. (Spouses do not need to die at the same time for their heirs to benefit from the £3m exemption.)

That means, in this example of a couple passing on a £2.2m farm, your child will not have to pay inheritance tax at all.

How many farms will actually pay inheritance tax?

This is where it gets complicated – but we’ll try to keep it simple.

The Treasury said around a quarter of farms would be affected by the changes – around 500 a year. (For context there are around 200,000 farms in the UK.)

The Treasury’s estimates are derived from actual data on how many farms have claimed Agricultural Property Relief (APR) on inheritance tax in previous years, and how many will now exceed the threshold for paying the tax.

Farmers’ groups say this could be underestimated because it does not take into account the variety of farms – which are farms that also run other businesses like B&Bs alongside their farming activities.

These farm estates are also using Business Property Relief (BPR) to reduce their tax burden, which is also currently subject to a million pound cap – and farming groups say that if the value of business assets is added, this will bring more people over the threshold. to pay.

However, in response to this, the Chancellor released further data. Figure from the end of 2022 shows that less than a quarter of combined APR and BPR claims were worth over £1.5 million – an amount that even a single person should be able to pass tax free.

So it appears that even if the business relief is taken into account, we should see only about a quarter of the farms that are responsible for the tax under the new rules.

The State Land and Business Association has announced a slightly different figure. The headlines are that 70,000 farms will be affected by the changes – this is about a third of all farms. (So, it’s only slightly larger than a quarter of the farms estimated by the Treasury.)

The reason the figures are so different is that the Treasury is looking at the number that would be affected over the course of a year – while the CLA estimates the number of farms in the country could be affected.

How many farms will end up with inheritance tax bills they can’t pay?

Farmers’ groups say many high-profit farms – so those with lots of acres and assets, so they may be subject to inheritance tax – have such low profits that they can’t afford to pay them. that tax.

Is this true? Unfortunately, we won’t have a clear answer until we get more data.

It is important to note that many farms in England and Wales have very low margins and many losses – the farmers’ group is right about this.

Defra data shows that last year, 30 percent of farms lost, while more than 25 percent made less than £25,000.

If your income looks like this, and you’re a single person passing on a £2.2 million farm – as in the example above – then you could be in trouble paying your £14,000 annual tax bill.

But the main problem is that we do not know how many farms are worth enough to be taxed, but also make little or no profit.

These may be some of the estates that have disappeared, or, as the farming groups claim, they may be a significant minority. The choice for farms like this is to take a loan, or sell part of the land to pay taxes – but farming groups say these two options will only make it harder for such farms to turn a profit.

(Image credit: Tayfun Salci/ZUMA Press Wire/Shutterstock.)