Inheritance Tax: Agricultural Property Relief should look ahead not behind

Should Inheritance Tax distinguish between the deserving rich and the undeserving rich?  A smart farmhouse and a few hundred acres make an attractive investment and a comfortable home.  Excellent capital growth offers a comfortable shelter from Inheritance Tax, and annual revenue returns at 2 or 3% pa compare well with other investment opportunities.  Add capital growth, and you have the prospect of 7% or more.  Own enough rural land and 14% annual return should not be beyond your reach.  What’s more you can enjoy all the privilege, status and privacy of a country life.

So why does this very attractive opportunity for the super-wealthy enjoy the protection of its own special relief, Agricultural Property Relief (APR)?  As if that’s not enough, if you structure it right anything not covered by APR will be dealt with by Business Property Relief (BPR).  APR provides up to 100% relief on the agricultural value of farmland including buildings, cottages and farmhouses.  BPR at 100% can go a long way to deal with the rest.

Now imagine a lifetime of toil.  Constantly on call to deal with late night calvings, up early again to milk the cows, long hours at harvest time, animal health worries, bovine tuberculosis, badger culls, the mindless bureaucracy of the Common Agricultural Policy, the weather, difficult harvest conditions, world price of grain, constant price and quality pressures from the supermarkets.  Land price inflation is all very well, but it’s not cash until you sell up and move on.  Meanwhile you have upwards of £10,000 per acre invested in land, stock, machinery and stores, all for an annual income after feed, seed, fertiliser, labour, machinery of no more than £100 to £200.  Or if you are a dairy farmer, selling milk for 25p/litre which costs you upwards of 29p/litre to produce.

On the one hand, Agricultural Property Relief looks like a tax relief scandalously open to abuse by the uber-rich.  On the other, it can also look like a well-deserved thank-you for unstinting efforts to maintain a domestic food supply.

But both views miss the point of Agricultural Property Relief.  The relief recognises that farming is a long-term, low-return, high-capital business vital to national security and self-reliance because we all need to eat and it’s better if our food doesn’t have to travel too far before we eat it.  So it is intended to be neither a haven for the wealthy or a thank you to hard working farmers.  It is meant to ensure that farm businesses do not have to be disrupted on inheritance by selling off vital assets like land or livestock to pay the tax bill.  Otherwise a business earning a return on capital of no more than 2% a year, will take 20 years’ profits to pay the tax bill, and by then it is nearly time for the next generation to die.

We need to rethink Agricultural Property Relief.  Instead of looking back, we should look forward.  Make the relief conditional, repayable if land or other property is sold within say 30 years without an equivalent replacement.  The only point to the relief is to protect capital invested in farming, continually dedicated to feeding a growing population.  That way we really could distinguish between the deserving and the undeserving rich.

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4 thoughts on “Inheritance Tax: Agricultural Property Relief should look ahead not behind

  1. Very interesting Charles but there isn’t enough room on a blog to take this into the interesting yet contentious area of what conditions you attach to a ‘future focussed’ APR. What place is there for protecting a landlord’s capital on the basis that the land is let to tenants and on what terms?

    1. Thanks for your comment David. First I think there is a place for protecting landlord’s capital. This is an argument for retaining APR instead of simply abolishing it, enabling farmers to claim BPR and landowners not in occupation nothing. The low revenue returns from let land justify this in my view, plus the flexibility that letting land provides to the farming industry, given that the higher total returns arise from valuation changes and don’t become real cash until land is sold.

      There is a connected issue with farm business tenancies (or others for that matter) where the tenant wants to diversify and this change of use might deny the landowner his agricultural property relief for little if any compensatory gain. I think a future looking APR might help with this too. The details are always important in these matters. However, broadly I would suggest we should be looking at continued occupation under the FBT or its successors. My parallel here is that a FBT which has satisfied the initial notice requirement continues to be a FBT even if the character of the holding changes beyond recognition from farming. Alternatively one might take a more woolly view that if the farm business itself would continue to qualify for APR in ‘the round’ (along the lines of the Farmer case) in the hands of an owner-occupier, then the landlord’s interest should continue to be eligible for APR.

      Obviously the conditions attached to a future focussed APR would be important. However as a start point I am conscious that in some cases the main house has been sold off within a short time of final decisions on APR (Golding where the house was granted relief, and McKenna where the claim failed). The sales seem to have taken place irrespective of the outcome of the claim for APR. In a situation like that it seems not unreasonable that the vendor should have to repay the value of any relief granted on the property at the time of death, putting them on a par with anybody else with a healthy inheritance. The really tricky balance in these cases is to get the right mix between not crippling an ongoing business and ensuring parity and equity between different taxpayers.

      Rationalisation/reorganisation of businesses might prove difficult – but perhaps there is a case for a parallel with reinvestment (rollover) relief from CGT?

      I wonder what others involved inthis field think? Note to HM Treasury or other interested parties – do get in touch if you want to engage my services to expand on these ideas!

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