The unintended consequences of taxes that overlap on a subject like Inheritance Tax - a UK example from the agricultural sector

1) Agricultural Property Relief (APR) allows owners of farm: land; buildings; cottages; housaes to pass these assets on to their families , either in their lifetime or via their will, free of Inhertance Tax (IHT). APR was originally introduced because, given the low profits in farming, and that, without APR, those inheriting farms would have to pay IHT at 40%, those inheriting would have to sell much of the farm inherited to service the IHT tax bill. To qualify for APR land must be used for genuine agricultural purposes. The relief can be either 50% or 100%, depending on factors like ownership and occupation. APR was seen as a way of encouraging the continuation of farming businesses within families.   

2) APR has attracted high net worth individuals who are not farmers, buy can see that investing their wealth in farmsgives them a IHT exempt asset. This tax advantage has driven up land prices, making it harder for farmers to buy land. Critics of APR have also pointed out that it benefits wealthy landowners at the expense of the taxpayer.  As farmland is increasingly viewed as a financial asset rather than a productive resource, there is a risk of neglecting soil health, biodiversity, and the production of essential food crops. 

3) Even if APR was abolished or capped, farmland would qualify, provided certain conditions were met, for another form of IHT relief called Business Relief (BR).  The relief can be either 50% or 100%, depending on the nature of the asset and the business. For instance, shares in unquoted companies typically qualify for 100% relief, while farmland used for business purposes might qualify for 50%.

4) Capital Gains Tax (CGT) rollover relief via APR allows farmers to sell land with planning permission for development (which has an uplifted value), and then rollover the proceeds into buying farmland without paying any CGT.  It is thought this rollowver buys a 1/3rd to 1/2 of all farmland in the UK 

5) If CGT is raised from 20% to 45% then this gives a bigger incentive for farmland oeners to rollover development gains into more farmland purchases 

6) The Private Eye article suggest that if APR was abolished that may raise more revenue for the Chancellor whilst helping to dampen farmland prices. The article is silent on how the IHT then payable on farms inherited would mean those inheriting, (who were from the low profit farming sectos) would probably have to sell much of the farm inherited to service the IHT tax bill. 

7) Reforms to close down the use of APR and BR as mechansims for high net worth individuals to get relief from IHT might include:

- Requiring a minimum ownership period or active involvement in management;

- Setting minimum profit levels or requiring a certain proportion of income to come from the asset;

- Limit the amount of relief available based on the size of the business or land holding. This would prevent large-scale land purchases solely for tax purposes;

- Introduce restrictions on relief for assets held within closely held companies, where ownership and control is concentrated among a small group of individuals;

- Implement measures to prevent asset disposal disguised as a transfer within a business structure to qualify for relief;

- Place restrictions on land use after claiming relief, preventing rapid changes in land use that are inconsistent with agricultural or business purposes.

8) Whatever combination of the abobe or other reforms might be chosesn, a gradual reduction in relief over a specified period would hopefully encourage a more balanced approach to estate planning.

Alternative Tax Incentives: Consider replacing or supplementing APR and BR with alternative incentives that support business growth and succession, without providing such significant tax advantages.

9) Obviously in all of this, it is essential to strike a balance between preserving the benefits of APR and BR for genuine business owners and farmers wishing to pass on their business to their families while preventing their abuse by the wealthy. 

Sources: 

 - Initially the asserted facts in a 'The Agri Brigade' article by 'Bio-Waste Spreader" in issue no. 1630 of Private Eye 16th August to 29th August 2024 

- Amended to include info from Gemini AI queries using these sources: 

a) Agricultural Property Relief for Farmers and Land Owners - Butcher & Barlow LLP; 

b) The advantages and urgent considerations of Agricultural Property Relief - Smailes Goldie; 

c) Agricultural Relief for Inheritance Tax - GOV.UK; A Brief Guide to Agricultural Property Relief - Herrington Carmichael Solicitors 

d) Business Relief explained | Octopus Investments;

e) Business Relief for Inheritance Tax: Overview - GOV.UK;

f) IHT Business Property Relief: Wholly or mainly - HMRC internal manual;

g) Agricultural Property Relief | A Guide for Landowners - Saffery;

- Amended given the application of HI