Why the farming inheritance tax changes could lead to farm closures

Since the Autumn budget, there has been a significant amount of discussion regarding the impacts of the changes to Inheritance Tax on farmers.

We discuss these changes on this blog, summarising exactly how farmers would be affected by the new measure. Broadly, the new measures are that:

• Rather than being able to claim 100% on agricultural property and business assets owned 2 years prior to death, the new measure will allow 100% relief only on the first £1 million of business and agricultural assets. Anything over this amount will then benefit from 50% relief and will be taxed at 20% (rather than the standard 40%)
• These liabilities will also be capable of being paid in instalments over a 10 year period

The government have said that only around 500 farms will pay more tax than they previously did, and that the tax is intended to affect large farms rather than small ones.

The National Farmers’ Union have however said that they believe around two thirds of farms could be affected by the changes.  

 More recently, there have been concerns from the farming community that their farms will have to close. Generally, farmers tend to be “asset rich and cash poor”, with the average farm income stated to be around £86,000 across all farm types. This may force some farmers to sell off their land in order to pay their inheritance tax bill, and in some cases may make their business commercially unviable.

According to a survey undertaken by Ashbridge Partners, who surveyed 2,000 farmers in the UK, more than one third of farms could go out of business in the next five years, with 56% of those surveyed saying that their farms will not be financially viable by 2035. 31% of those surveyed further stated that they will need to pay over £500,000 in inheritance tax. For some, this would mean that even with instalments they would struggle to pay their tax bill.

Of course, the number of farmers surveyed does not account for the majority of farmers – according to Government figures, the UK agriculture industry is made up of 209,000 farm holdings, where the number of farmers surveyed was 2,000. However, the “family farm tax” has been divisive and unpopular, given thesignificant fear from some farmers that their farms will have to close in the next 10 years.

Many commentators have speculated that potential tax issues can be countered with careful tax and estate planning and so we may see a drive in demand for support for farming families from the professional services sector.