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Can a compromise on APR be achieved?

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The Budget proposals have created a furore among farmers and landowners. Could a conditional exemption be the solution?

 Ostensibly to justify the Budget changes, the government has said that they are ‘better targeting reliefs to make them fairer, protecting small family farms’. They cite figures to indicate that the highest 9% of claims (154 claims in total) accounted for 62% of all agricultural property relief (APR) claims, costing £338m in tax.

Under current legislation, it is reasonably clear that if an individual taxpayer raises cash to buy a farm, farms it for two years, and then dies, his successors could claim the relief and pay no IHT on either the land or, if it has since been sold, its proceeds of sale. If the farm is sold, little or no CGT should be payable either due to the uplift in base cost to the value of the farm on the owner’s death. The government may consider this sort of planning unacceptable which should be stopped, especially for the richest where values can be very high.

The farming community is in uproar because the Budget proposals involve IHT having to be paid on a proportion of the value of the farm, even though it may have been owned by the same family for generations and there may be no intention of selling the farm. The owner’s successors may wish to continue the same business as before, and not have it decimated or reduced by IHT.

What compromise could be found?

When the owner of scenic land dies, there is already a separate exemption from IHT, known as conditional exemption, which the deceased owner’s successors can claim if they give various undertakings largely to do with the management of the land. Then, if this conditional exemption is claimed, IHT on the owner’s death is deferred until the land is sold or the undertakings are breached.

In those cases, broadly, the deferred IHT becomes payable on the sale proceeds, or the value of the land when the undertakings are breached. When calculating this clawback charge the proceeds or value will not be reduced for IHT purposes by APR.

It seems to me that a similar form of conditional exemption could be introduced to replace the current Budget proposals. If such a new conditional exemption were to be claimed, tax on the otherwise chargeable part of the value of the farm under the Budget proposals would be deferred until a future sale of the farm or if and when the undertakings are breached.

The landowner’s successors would retain ownership of the whole farm and farming business indefinitely, with the deferred IHT having to be paid only on sale or when undertakings are breached or withdrawn. This will be entirely under the successors’ control.

Little has been heard of the current conditional exemption over scenic land because not all land in the UK can qualify as scenic, and also because the widespread availability of 100% APR means that it usually does not have to be considered. However, as discussed above, it could form the basis of a new conditional exemption over farms and farming businesses.

Would the government consider a compromise solution along these lines? 

Charles Richardson, Kingsley Napley
Issue: 1687
Categories: In brief
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