The Future of Inheritance Tax Relief for Farms: could conditional exemption be the answer?
Francis Hudson · Posted on: January 15th 2025 · read
Recent proposals announced in the Autumn Budget 2024 regarding Inheritance Tax (IHT) have sparked concern within the farming community.
The government proposed tightening reliefs like Agricultural Property Relief (APR) to make them “fairer” and more targeted, aiming to curb what they see as disproportionate claims from wealthy landowners.
Read more: Autumn Budget opinion: A blow for farming?
This has led to grave concerns among farmers, culminating in a significant protest in London on November 19, 2024. Thousands of farmers, some driving tractors through central London, demonstrated against these new measures, expressing fears that they will jeopardise the future of family-run farms.
In response to these concerns, the Government line has been to state that farms up to £3 million would not suffer. However, this is only applicable where the farm is jointly owned by a married couple and there also remain many family farms exceeding this amount.
A potential compromise might lie in adapting the concept of conditional exemption—an existing relief for scenic land— thereby offering a pathway to alleviate the financial burden on farmers while preserving the integrity of family farms.
What is conditional exemption?
Conditional exemption is a relief designed to preserve scenic land, typically areas of outstanding natural beauty, for the benefit of the public and future generations. This exemption defers IHT until the land is sold or the conditions of the exemption are violated. The landowner or their heirs must agree to maintain the land according to specific undertakings, which may include keeping the land accessible or ensuring it remains in its natural state.
This relief prevents the immediate need to sell valuable land to pay for IHT, instead deferring the tax until a later date. If the conditions are broken or the land is sold, the deferred IHT becomes due, based on the sale proceeds or the land’s value at the time.
A potential solution for farms
The current budget proposals threaten to impose IHT on agricultural land, even in cases where the farm has been passed down through generations. This could force families to sell part of their land or the farm itself to meet the tax liability, undermining the continued operation of the farm and the family business.
In response, some have suggested adapting the conditional exemption relief to agricultural land. Under this new exemption, families could continue to own and farm the land, with IHT deferred until the land is sold or the agreed conditions are breached. The deferred tax would only become payable when the farm is sold, or the conditions - likely related to farming practices and land use -are violated.
This approach would allow farmers to maintain their businesses without the immediate financial burden of IHT. It would give them the flexibility to continue farming, preserving the land for future generations without fear of losing it due to tax obligations.
Benefits of conditional exemption for farms
- Preservation of family farms: The main advantage of such an exemption is that it would allow farm owners to pass down their land and businesses without having to sell off portions of it to cover IHT. It would enable them to focus on the long-term sustainability of their farming operations.
- Deferred tax payment: By deferring IHT, this exemption would alleviate the pressure on farmers to pay substantial taxes upon inheriting land. The tax would only be due when the land is sold, or if the conditions of the exemption are broken. This provides flexibility for farm businesses to plan for the future.
- Equitable solution: Conditional exemption could offer a more balanced solution by providing tax relief to those who genuinely need it, while ensuring that the land remains used for farming or other public benefits, similar to how scenic land is preserved.
Challenges and considerations
While this approach offers potential benefits, several challenges remain. The government may be reluctant to introduce such an exemption, as it could be seen as a way of continuing favourable tax treatment for wealthier landowners. Additionally, the specifics of the conditions - what farm owners would need to agree to - would need careful consideration to ensure they are both feasible and in line with the long-term goals of preserving agricultural businesses.
Furthermore, any deferred tax would eventually have to be paid, so it’s important for farm owners to plan ahead for the future tax liabilities.
Looking ahead to the future
The idea of applying a conditional exemption to agricultural land could provide a much-needed compromise for farmers worried about the impact of proposed IHT changes.
By deferring IHT payments until the land is sold or the conditions of the exemption are broken, this approach would allow families to continue farming and preserve their land without the threat of immediate tax burdens.
While the future of this proposal remains uncertain, it offers a potential pathway for preserving both family farms and the broader rural economy.
How MHA can help
Our tax experts understand the challenges that businesses and individuals face to meet the impact of ever evolving tax policy, and we can help you to navigate your compliance obligations.
Please contact our private client tax team to discuss this matter further, or with any other tax-related queries.
