IHT unlimited exemption is ‘unsustainable’, minister tells peers

The Earl of Leicester (Con), a farmer himself, began the debate by pointing out that agriculture property relief (APR) was introduced in the Inheritance Tax Act 1984 to protect Britain’s family farms from being sold and broken up. He added that, along with APR, business property relief (BPR) is a ‘necessary’ tax relief that helps people do business across multigenerational businesses.

The Conservative peer challenged the government argument that a reduction in BPR relief increases economic activity, saying “the reality is that an increase in tax burden on businesses due to increased costs will lead to reduced investment, reduced headcount, reduced turnover, partial or full selling of the business, reduced stability and, crucially, reduced competitiveness versus foreign and non-family businesses that do not have to pay these charges or make tax planning a priority”.

Baroness Mallalieu (Lab), who is also president of the Countryside Alliance, expressed concern about the number of farmers who would be affected. She suggested that the policy would catch farms with anything over 200 acres, saying: “The blow to them is exceptionally cruel because it strikes not just at the pockets, as most tax rises do, but at a whole way of life”.

This message was echoed by another farming peer, Lord Curry of Kirkharle (cross bencher (CB)), who labelled the Treasury estimates “far too simplistic” and argued that the changes to APR and BPR demonstrate a complete “misunderstanding of the way the countryside is managed”. Like a number of other contributors he suggested that: “To try to capture those who are investing in land only as a tax shelter is perfectly understandable, but to destroy thousands of family farms in the process is unacceptable.”

Baroness Miller of Chilthorne Domer, the Liberal Democrat spokesperson, spoke about the “massive increase in land values” which, she said, made it “much harder to enter farming now”. Guy Singh-Watson of Riverford, who farms both in Devon and in the French Vendée, had observed that, in France, the price of land is less than a 10th of its equivalent in Devon. Why is that? The Baroness said that she has spent a bit of time in France, “and I have seen that you cannot just buy up land speculatively because the government make sure that the people buying it are serious farmers and are qualified to farm… Some noble Lords may say that there is too much control there, but it has meant that land is available for genuine farmers.”

The Lord Bishop of Norwich referred to Treasury figures indicating that a significant portion of the funds raised through these reforms would come from wealthy farm estates. He urged the government to increase the APR threshold. Moreover, he asked if the rules could be tweaked around tax-free gifts made in the seven years before death and exempt people over a certain age. He argued that this move would allow farm owners who die in the next seven years to have an opportunity to make tax-avoiding gifts in light of the Budget changes.

Baroness Foster of Aghadrumsee (Non-Affiliated) also requested that the threshold be raised. “I would prefer the tax to be scrapped but, if that does not find favour with the Treasury, please set the threshold much higher—so you are not attacking the rural way of life—or have a definition of an active farmer and exempt active farmers from the tax. That would deal with those who are buying up farmland for other purposes. That is what happens in Germany and the Republic of Ireland, so solutions are available.”

The Earl of Devon (CB), another farmer, said there was a good thing in this policy: “[W]e will get farms and family businesses into the younger generation’s hands sooner. We have complained for years about flatlining productivity in the rural economy and farming. If we can get these businesses into younger and more ambitious hands sooner, that may be a good thing. However, the way the Government have done it is so cruel.” He also suggested that, by pushing up fertiliser prices, the carbon border adjustment will increase the burden on farmers from 2027.

Another cross bench peer, Lord Bilimoria, cited the National Farmers’ Union (NFU) which considered the government’s assumptions regarding this policy to be ‘flawed’. He said: “It [NFU] says that there is a failure to adjust for inflation, an unfair inclusion of non-commercial holdings and an underestimation of the tax burden of APR and BPR combined”. He said that the £1 million threshold would see cereal farms’ returns ‘entirely’ wiped out by their tax liabilities while dairy farms would lose approximately 50% of their returns to IHT.

Lord Londesborough (CB) recommended the government cap BPR and APR at £2.5 million per person, with a 20% tax rate up to £5 million and a full 40% rate above that. He believed this way the policy would be “more measured and proportionate” and would generate the budgeted tax revenues.

Lord Rogan (UUP) shared the analysis done by the Department of Agriculture, Environment and Rural Affairs in Northern Ireland which indicates that as a result of IHT changes around half of the 26,000 farms in Northern Ireland could be impacted. He labelled the tax increase Labour’s “biggest mistake” and urged the government to scrap it.

Baroness Bennett of Manor Castle (Green Party) welcomed the idea of “cracking down on tax dodging where the purchase of land is being used by individuals who are companies to dodge tax”, however, the Baroness said “it should not be beyond the wit of the Government to make a distinction between that use of land and genuine farming businesses”.

Baroness Bakewell of Hardington Mandeville (Lib Dem) acknowledged the government’s aim to eliminate loopholes used by the wealthy. However, she argued that these measures would affect working farmers, including those with modest operations, resulting in up to 66% of farms facing higher tax bills. “It is right that the wealthy farmers and landowners should pay inheritance tax, but the effect on the smaller family farm has been misjudged,” she said. “I ask the minister and his Treasury colleagues to think again.”

“This was a disastrous Budget for family businesses”, stated Lord Roborough (Con). On tenant farmers, the peer suggested that the loss of 50% APR would “incentivise private landlords to dispose of their land rather than let it out”. He said that rental yields are usually less than 2% before tax, making the payment of inheritance tax “completely unaffordable”.

Lord Roborough argued that: “While family businesses outside farming may be better placed through lower capital intensity to pay this death tax, many, if not most, will be structured as companies, with the tax paid from dividends. The cost on those companies being transferred from one generation to the next will incur a full inheritance tax rate of around 50%, as tax on dividends will also be levied prior to HMRC getting its money”.

Responding to the debate, the Financial Secretary to the Treasury, Lord Livermore, acknowledged that IHT is an “emotive issue”. However he claimed that the full, unlimited exemption, introduced in 1992, has become ‘unsustainable’. He said that, under the current system, the 100% relief on business and agricultural assets is “heavily skewed” towards the rich landowners and business owners, and more than 50% of BPR is claimed by only 4% of estates. The minister continued that buying agricultural land is currently one of the most ‘well-known’ ways to shield wealth from IHT and it ‘artificially’ inflates the price of farmland.

Lord Livermore emphasised that all estates making claims for APR and BPR reliefs will continue to receive ‘generous’ support. He believed that forecasts for the impact of these changes over a long period are ‘unreliable’, as estates will make changes to the way they plan their tax affairs to reduce their liabilities. He quoted the Institute for Fiscal Studies which said that the government’s reforms would leave farmland “much more lightly taxed than most other assets”.

The minister argued that there is some ‘misinformation’ around this policy, in particular, focused on the data used. (He encouraged members to review the letter that the Chancellor sent to the Treasury Select Committee.) He said the data the government has used is based on HMRC’s IHT claims data and is the most ‘robust’ data out there.

On the Northern Ireland (and other organisations’) analysis, the minister said that the data reflects the total value of farms nationwide and cannot accurately calculate IHT liability, as exceeding the exemption threshold doesn’t guarantee tax payment. He added that key factors like ownership structure, number of owners, and succession planning are also not accounted for.

About the consideration of dispensation for farmers above a certain age, Lord Livermore emphasised that the government remains committed to the Budget changes, but individual circumstances vary, so they should consult financial advisers. In relation to raising the threshold level, he believes the government is taking a ‘balanced’ approach in supporting farms and fixing the public finances in a fair way.

You can read the full debate here.