This blog is based on a piece, written by George Dunn, TFA Chief Executive, for The Cumberland News and Westmorland Gazette, published on 29 November 2024.

It is looking increasingly unlikely that the Government will undertake a U-turn on its Inheritance Tax policies announced as part of the Rachel Reeves budget on 30 October 2024. Given the Government has resisted the barrage of criticism from its own Party ranks concerning both the two-child benefit cap and the removal of the winter fuel allowance, it is difficult to see why the Government would choose to bend to the will of the farming community and the Opposition Parties. Whilst, of course, I might be wrong, if this is the way of things, we should be looking for ways in which the policy can be finessed to avoid unintended consequences.

In responding to the Budget statement the TFA said that it understood and agreed with the premise that it was unfair that wealthy individuals were able to enter the land market, having made capital gains in other parts of the economy, to hide their wealth from tax. However, it is very clear that in choosing to focus on Inheritance Tax, the Chancellor has pulled the wrong lever.

Instead, to quell the incentive for wealthy individuals to purchase land in a way to avoid tax it would have been better to have abolished Capital Gains Tax (CGT) rollover relief – something which the TFA had suggested in its submission made in advance of the budget. In fact, having increased the rate of CGT in the Budget and with the Inheritance Tax provisions on business and agricultural assets now to be charged at 50% of the normal rate, the fear is that the Government will have increased the incentive for new money to come into the land market from capital gains made elsewhere. However, at the same time, the Government has left a huge problem for old money landlords who have traditionally let their land to hard-working tenant farmers.

Those old money landlords are now taking advice from a plethora of wealth management gurus who, in various ways, are attempting to find new ways for wealth to be held tax efficiently. A lot of that will involve restructuring estates to maximise their ability to avoid tax. With the landlord community being considerably risk averse, we are anticipating many situations where private landlords will be seeking to bring back into hand land currently let under short-term FBT agreements to provide them with options for wealth management or to raise the funds necessary to pay any expected tax bill. We could see many FBT agreements being ended and many tenancy agreements that should have been offered being pulled from the market

In addition, it is also anticipated that landlords will scale back investment in buildings and fixed equipment on let holdings for fear of increasing their value and their exposure to tax.

That is why we need an urgent finessing of this policy. A reasonable way forward would be to allow landlords to add into the zero-rate band for inheritance tax the value of any agricultural land let to tenant farmers on secure tenancy agreements let under the Agricultural Holdings Act 1986 or FBT agreements let for 10 years or more without scheduled, unconditional break clauses. In addition, land let for crops usually grown in short rotation could also be included within the zero rate band. However, the new tax charge would continue to apply to those estates letting land outside those parameters.

Incentivising longer term farm tenancy agreements would also sit well with wider Government policy on rural economic growth, farm resilience, food security and the provision of public goods including in respect of environmental management and carbon sequestration and storage.

In addition, to ease the burden on the industry more widely, two other sensible changes would be to increase the APR/BPR zero rate band to £2 million and allow that allowance to be transferable between spouses and civil partners to provide an overall limit of £5 million rather than the £3 million currently suggested.

To achieve this, we need diplomacy whilst the Treasury door remains ajar, which, for now, it currently appears to be.