Something I don’t understand about IHT and family farms
Discussion
On the face of it the IHT changes seem catastrophic for family farms. Very few arable farms will fall below the threshold, as you need at least a couple of hundred hectares plus expensive infra-structure and equipment to make enough money to live on. Any tax would almost certainly result in having to sell land, making the business less sustainable.
However, outside the agricultural sector there are many other privately owned businesses, and some are huge. What happens when an owner dies in these cases? You never hear of hundreds of employees being laid off or big orders being cancelled as IHT needs to be paid - or do you? Does a privately owned football club (for example) have to sell its best player when the owner dies?
If (as I suspect) these businesses do things differently - then why don’t family farms copy them?
However, outside the agricultural sector there are many other privately owned businesses, and some are huge. What happens when an owner dies in these cases? You never hear of hundreds of employees being laid off or big orders being cancelled as IHT needs to be paid - or do you? Does a privately owned football club (for example) have to sell its best player when the owner dies?
If (as I suspect) these businesses do things differently - then why don’t family farms copy them?
Foss62 said:
If (as I suspect) these businesses do things differently - then why don’t family farms copy them?
One reason is that, until now, they haven't needed to.Another is that many farmers are tenants, and the land owners may have different arrangements in place for their legacies.
It's been discussed a lot elsewhere on PH, but tl;dr: it's not black and white.
I think part of the reason you don’t see it so much out of agriculture is generally in other business the owners stop & retire or pass on earlier so folk dieing owning businesses is less frequent
Look at some of the folks being shown on tv, longevity has meant some of them are in their 50’s & 60’s doing all the work & drawing salary & still waiting to inherit as the generation before didn’t pass down anything yet “all this will be yours one day when I’m gone”. An agri banker once told me one of the big issues they have is that the age farmers get control of a business & start running things is getting later & later..
Succession planning is a huge problem in agri sector, families don’t speak about, yet it’s regularly a feature in agricultural magazines trying to bring it out.
Look at some of the folks being shown on tv, longevity has meant some of them are in their 50’s & 60’s doing all the work & drawing salary & still waiting to inherit as the generation before didn’t pass down anything yet “all this will be yours one day when I’m gone”. An agri banker once told me one of the big issues they have is that the age farmers get control of a business & start running things is getting later & later..
Succession planning is a huge problem in agri sector, families don’t speak about, yet it’s regularly a feature in agricultural magazines trying to bring it out.
The historic system - man owns a farm, uses it for farming, earns a living just about. Upon death this passes to eldest son free of tax, who does the same.
Now - tax planners become aware of the system. Wealthy individual buys a farm with money earned elsewhere. Land rented to tenant, farmhouse and buildings rented out, no income from farming. Individual dies leaving farm free of inheritance tax to eldest son.
This is why agricultural land values have gone through the roof in recent years.
Now - tax planners become aware of the system. Wealthy individual buys a farm with money earned elsewhere. Land rented to tenant, farmhouse and buildings rented out, no income from farming. Individual dies leaving farm free of inheritance tax to eldest son.
This is why agricultural land values have gone through the roof in recent years.
It seems part of the problem is that there is no time for those old farmers to tax plan as they will likely die before things expire.
They don’t have time to tax plan. Changing long term rules with little notice is really poor.
Luckily we have been gifted with a government with great names like Reeves Thieves and Starmer Farmer Harmer to at least give us something to laugh about.
They don’t have time to tax plan. Changing long term rules with little notice is really poor.
Luckily we have been gifted with a government with great names like Reeves Thieves and Starmer Farmer Harmer to at least give us something to laugh about.
mtvessel said:
The historic system - man owns a farm, uses it for farming, earns a living just about. Upon death this passes to eldest son free of tax, who does the same.
Now - tax planners become aware of the system. Wealthy individual buys a farm with money earned elsewhere. Land rented to tenant, farmhouse and buildings rented out, no income from farming. Individual dies leaving farm free of inheritance tax to eldest son.
This is why agricultural land values have gone through the roof in recent years.
Not that historic - 1992, so just one generation of farmers. And the majority of land in UK has always been tenant farmed - in 2022 it was 60% of the land. (rock report on tenant farming, 2022)Now - tax planners become aware of the system. Wealthy individual buys a farm with money earned elsewhere. Land rented to tenant, farmhouse and buildings rented out, no income from farming. Individual dies leaving farm free of inheritance tax to eldest son.
This is why agricultural land values have gone through the roof in recent years.
mtvessel said:
Wealthy individual buys a farm with money earned elsewhere. Land rented to tenant, farmhouse and buildings rented out, no income from farming.
You have missed the fundamental point that ONLY agricultural assets attract tax relief. You can't run a BTL on a farm and claim APR!When the entire farm is let to a tenant farmer that tenant is a "farmer" and the landlord's income comes "from farming".
And it's not just any old lease/tenancy of a farm. The form of tenancy must be in the specific form of a Farm Business Tenancy, known as an FBT. That tenancy cannot contain non-farming assets.
You can't build a footballer's bling palace on a 10 acre farm and claim APR; the "farm house and buildings" must be in proportion to the scale of the farm.
Panamax said:
mtvessel said:
Wealthy individual buys a farm with money earned elsewhere. Land rented to tenant, farmhouse and buildings rented out, no income from farming.
You have missed the fundamental point that ONLY agricultural assets attract tax relief. You can't run a BTL on a farm and claim APR!A lot of the noise I am seeing about this change is from farming families where when the farmer dies the farm would’ve been sold anyway & proceeds split between children, they are suddenly potentially getting less & not happy. (I think they should quite rightly have been taxed on this when agri relief was not being used as intended - its one big reason why many farms have not been sold/passed on before now)
MrBig said:
Stupid question. Can the aggrieved farmers not transfer ownership to their children now or put the farms into trust to negate IHT?
Yes I am a simpleton and will probably be flamed for it, but it's something I have heard of being done with other assets.
Not going to comment on the trust part but yes they could transfer ownership to their children now to negate IHT. There are however a couple of important "buts" to this and although in general I am in favour of the policy overall I would like to see some mitigation at least around the first one.Yes I am a simpleton and will probably be flamed for it, but it's something I have heard of being done with other assets.
If you die within 7 years then the transfer will still be considered as part of your estate with an allowance for the amount of time that has passed (as I understand it). So if you die in 3 1/2 years then half of the transfer is still your estate. As no one was expecting this, perhaps naively, then there has been no time to prepare for this. I would think you could give a years grace to transfer and then for the next seven years ignore farms in this situation. After that all is fair again.
Secondly it needs to be a complete gift. So if you give the children the farm and farmhouse and carry on living in the farmhouse without paying your children a market rent then it can be deemed that the farmhouse wasn't really gifted. This is easier to manage I would suggest as there are a few options, move out of the house, pay rent or split the farmhouse from the land, transfer the land now and only have IHT to pay on the farmhouse down the road.
The fundamental problem here is that any attempt to avoid the IHT involves paying CGT because transfer to a family member (or trust) is a disposal for CGT purposes.
CGT is now a huge problem because,
There's no indexation of original cost - CGT is a tax on inflation
The rate of CGT has been increased from 20% to 24% and there's almost no annual tax free allowance.
Example:
Farm with base value £1m in 2000
Value today, say, £2m
Disposal of the farm will trigger tax of 24% of £1m = £240,000
Compare:
Farmer dies with farm worth £2m
IHT at 20% on £1m (excess over £1m tax free allowance) = £200,000
There is no way out of this tax for farmers.
CGT is now a huge problem because,
There's no indexation of original cost - CGT is a tax on inflation
The rate of CGT has been increased from 20% to 24% and there's almost no annual tax free allowance.
Example:
Farm with base value £1m in 2000
Value today, say, £2m
Disposal of the farm will trigger tax of 24% of £1m = £240,000
Compare:
Farmer dies with farm worth £2m
IHT at 20% on £1m (excess over £1m tax free allowance) = £200,000
There is no way out of this tax for farmers.
Panamax said:
The fundamental problem here is that any attempt to avoid the IHT involves paying CGT because transfer to a family member (or trust) is a disposal for CGT purposes.
CGT is now a huge problem because,
There's no indexation of original cost - CGT is a tax on inflation
The rate of CGT has been increased from 20% to 24% and there's almost no annual tax free allowance.
Example:
Farm with base value £1m in 2000
Value today, say, £2m
Disposal of the farm will trigger tax of 24% of £1m = £240,000
Compare:
Farmer dies with farm worth £2m
IHT at 20% on £1m (excess over £1m tax free allowance) = £200,000
There is no way out of this tax for farmers.
Agree - indexation stopped back in 2008 (?) and just as you say any attempt to now avoid IHT just compound's the issue.CGT is now a huge problem because,
There's no indexation of original cost - CGT is a tax on inflation
The rate of CGT has been increased from 20% to 24% and there's almost no annual tax free allowance.
Example:
Farm with base value £1m in 2000
Value today, say, £2m
Disposal of the farm will trigger tax of 24% of £1m = £240,000
Compare:
Farmer dies with farm worth £2m
IHT at 20% on £1m (excess over £1m tax free allowance) = £200,000
There is no way out of this tax for farmers.
Presumably those that didn't do anything to mitigate also don't have any loss carry forward quantum to "help" the situation.
Panamax said:
The fundamental problem here is that any attempt to avoid the IHT involves paying CGT because transfer to a family member (or trust) is a disposal for CGT purposes.
Why can't a farmer gift the farm to his son? Of course he's got to stay alive for 7yrs, but could cover that risk with life assurance.Gassing Station | Finance | Top of Page | What's New | My Stuff