How to solve the farmers' revolt

The announcement of restrictions to Agricultural Property Relief (APR) and Business Property Relief (BPR) was the biggest surprise for many, and arguably the biggest gamble made by Rachel Reeves in her inaugural Autumn Budget.

Most of the other tax changes announced in the Autumn Budget were tried and tested routes to raising revenues. Given Ms Reeves had already incurred the wrath of pensioners, one might have expected her to steer clear from policies which court controversy but generate limited tax revenues.

It was widely expected that there might be some reforms to inheritance tax (IHT) reliefs, but many thought these would be more refined changes, perhaps a tightening up of the rules to ensure they were clearly targeted at trading businesses, and subject to a consultation. Instead, the Chancellor appears to have wandered into a minefield rather than a field of gold.

Whilst some are badging the foray on farmers as Rachel Reeves’ own ‘pasty tax’ moment, it is difficult to foresee the government proposing a simple U-turn on the issue. There is perhaps a different track that could be taken that might prove acceptable to all.

A key issue with the IHT relief changes is that they may suddenly place a tax burden on certain estates that don’t have the means to pay it without selling the underlying business assets. While it will be possible for many business owners and farmers to plan around these new rules in the future, for some it will likely distort crucial decisions around when to pass on or sell a business.

One aim of these reliefs is to ensure that tax did not get in the way of such decision making. Business succession can be hard enough, and should really be driven by the appropriate commercial decision, rather than the motivation of tax mitigation.

That said, these IHT reliefs have been distorting taxpayer behaviour in a different way. They have allowed assets to be passed on free from IHT and capital gains tax (CGT), as any historic CGT exposure is effectively eliminated on death. As a result, some business owners and farmers may have held onto their business assets for longer than they might otherwise have done. If the Chancellor wants to remedy a mischief, she may find that a more appropriate target.

A middle ground between the two camps could be if APR and BPR are restored to providing 100% IHT relief on qualifying assets, but it comes with a cost of the beneficiary also inheriting any capital gain. No tax would be payable on death. Instead, if inherited business assets or farmland were later sold by the beneficiary, CGT would ordinarily be payable then. As a result, any tax payment would usually be deferred until there were liquid cash proceeds available, instead of a dry tax charge.

As the higher CGT rate of 24% is slightly higher than the proposed effective 20% IHT rate on qualifying APR/BPR property over the £1m allowance, the amount of tax raised from this hypothetical change, over time, may not be dissimilar to that in the initial proposal. At the same time, families would be able to rest assured that the death of a family member would not put their farm or business at risk. While such a move might remain unpopular, farmers and business owners may prefer it to the alternative of participating in an IHT lottery where nobody wants the winning ticket.