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Labour’s 2024 Budget: The Challenges for Farmers and All UK Businesses.
08 Nov 2024
The Autumn Budget 2024 has reshaped the Inheritance Tax (IHT) landscape for private UK businesses. Starting in April 2026, the cap of £1 million on 100% IHT relief will apply equally to farmers and all business owners. This policy targets not only individuals like Sir James Dyson as a farmer but also large enterprises such as Dyson UK Group Ltd. Importantly, the proposed cap impacts all family-owned, medium-sized, and larger businesses—from JCB to Timpsons—in the same way it affects farmers. It raises the question of whether the current Prisons Minister might be able to influence this sweeping measure.
This approach is like using a sledgehammer to crack a small nut; without careful planning, many business owners risk being caught in the crush.
Data
The government’s reliance on data from 2021–22 to argue that 73% of farmers will remain unaffected seems flawed. There are several reasons for this discrepancy:
- Agricultural Property Relief (APR) applies only to agricultural land and property, while Business Relief (BR) covers other business assets, such as machinery, stock, cash, and debtors.
- Farmers have historically claimed both APR and BR upon death, which hasn’t been fully accounted for in the government’s figures.
- Additionally, we’ve seen IHT forms prepared after a farmer’s death where only BR was claimed for all assets, including land. Although APR should typically be claimed first, this is often overlooked since no tax has previously been at stake—further skewing the data.
It’s worth noting that the relief cap applies per person. For a married couple, 100% relief could equate to £3 million, assuming £1 million each of capped IHT relief and the combined Nil Rate Band and Residence Nil Rate Band. However, this applies only if individual assets are under £2.35 million; otherwise, there’s no Residence Nil Rate Band available.
All business owners will need to plan for the changes this Budget brings, but farmers are especially vulnerable due to the low returns of farming. The profit generated from the assets held is far lower than in other industries.
Size Of The Problem
In 2023, the average farm size was 88 hectares (217 acres), according to DEFRA. This figure may seem low, as the average is skewed by both the largest and smallest areas.
For example, let’s assume a more accurate figure of 350 acres, with a farmhouse and cottage, equipment valued at £1.25m, and debt of £500,000. At £10,000 per acre for land and £750,000 for the properties, the total assets would be £5m. In such a case, the full Nil Rate Bands of £1m, including the Residence Nil Rate Band, may not be available.
If each spouse can claim £1m in capped 100% IHT relief, the inheritance tax on the second spouse to die would amount to £470,000. This would be payable over ten years, at £47,000 per year, interest-free.
The Government believes this is affordable for the business. However, in most cases, it is not. Many farms make a return of perhaps 1% on capital each year, which in this example would amount to £50,000 before income tax. The Inheritance Tax is simply unaffordable.
The Future
For many business owners, succession planning may increasingly involve gifting assets sooner and hoping to survive the seven-year threshold. The older generation might retain up to £2 million in land, a house, and other investments, possibly leasing land to the next generation to provide them with an income stream. Wealthier individuals may also have the option to retain funds and spend capital over time.
However, this approach doesn’t address the needs of older business owners who may not have seven years. In these cases, careful tax planning will be crucial. The key will be to adapt current strategies early, drawing on professional advice to respond effectively as policy details evolve.
The proposed cap on Business Relief poses a significant threat to all family businesses valued over £1 million per owner, not only in agriculture but across sectors. This includes everyone from farmers to cobblers and large-scale manufacturers. For example, notable UK businesses like Dysons, Timpsons, and Bamfords should unite with agricultural enterprises to engage actively in the consultation process, advocating for major revisions to the proposed changes.
The stakes are high: food production, UK manufacturing, and the broader economy rely on a fair and sustainable approach to business taxation.
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