House of Lords inquiry: Peers hear concerns over inheritance tax changes for farms and businesses

The panel comprised:

• Emma Chamberlain, barrister at Pump Court Tax Chambers, representing the Chartered Institute of Taxation (CIOT) and the Society of Trust and Estate Practitioners (STEP)
• Katherine Ford, Technical Manager, Tax, Institute of Chartered Accountants in England and Wales (ICAEW)
• Helen Thornley, Technical Officer, Association of Taxation Technicians (ATT)
• Leontia Doran, UK tax lead for Chartered Accountants Ireland

Complexity and Valuation Challenges

The Chair opened by asking how easy it would be for eligible taxpayers to work out the impact of the proposed changes on their IHT liability, especially where both business property relief (BPR) and agricultural property relief (APR) are claimed. Emma Chamberlain was unequivocal: “Not easy. The Revenue has consistently said that not many estates are affected. That may be true for actually paying inheritance tax, but every estate with business property and agricultural property will have to value it unless the business property is worth almost nothing.” She explained, “Valuation, as we all know, is an art, not a science. If you have minority shareholdings, you could be in dispute for a very long time over what those are worth. How will a 30% or 20% share in a business be valued? Ease of working out your liability will not be straightforward in all cases.”

Katherine Ford agreed, noting, “It is definitely not for the faint-hearted. You will be commissioning an adviser to do a review of your current exposure.” Helen Thornley added, “It is a very complex relief and, to date, all you have had to focus on for APR and BPR are the nuances of whether you meet the criteria. You could work with ballpark figures and say, ‘It is £10,000 an acre value’, and you did not have to think about it. Now you will have to ask whether it is £10,000, £9,000 or £12,000, and get somebody to come out and value it.”

Leontia Doran highlighted the wider market impact: “There will be taxpayers who have never had to take professional advice previously because they qualified for 100% relief, particularly sole farm owners. It is quite common, especially in NI, for the farmer to own that farm on their own. I think that the wider ripple effect on the market has not been addressed.”

The £3 Million Allowance: Theory vs. Practice

The Government’s assertion that the changes would not be as complicated as claimed, particularly for married couples, was robustly challenged. Ford stated, “If assets pass to the surviving spouse, as it stands the £1 million allowance of the person who has died will be wasted. It is not transferable in the same way that the nil-rate band and the residential nil-rate band are. For the £1 million not to be transferable makes it incredibly complicated.”

Chamberlain agreed: “The £3 million is a theoretical concept, but it will not often be available. There is no doubt that the changes complicate will-drafting quite considerably because of the way people want to maximise the relief, both the £1 million and the 50%.” Helen Thornley added, “Essentially, the £3 million is possible but it requires a very specific set of circumstances. If you are not within those circumstances, you may not be able to get yourself into that window.”

Valuation Bottlenecks and Professional Capacity

The panel discussed the practicalities of moving from book cost valuations to fuller market valuations. Thornley observed, “Everything can be valued but we probably do not have the number of valuers that we will need for some of the business assets. As Emma was saying, valuing company shares is an exercise with specialist rules and a lot of range for negotiation.”

Doran echoed this, “They have been advising their members on what actions need to be taken and about the robustness that will be needed for valuations, and the concern is that there simply will not be enough professionals able to provide these values in the time and space needed, six months from the end of the month of death.”

Chamberlain suggested, “Practically, I believe HMRC will probably be interested in AI for property valuations and developing that. It will have to, just to deal with the position.” Ford warned, “The problem with delays in agreeing valuations is that you still have 8% late payment interest running in the background. The longer that valuations take to agree, the worse it is for the estate.”

Raising Cash to Pay IHT

The challenge of raising cash to pay IHT on qualifying assets was a recurring theme. Helen Thornley explained, “You need to raise the cash to pay the inheritance tax to get probate. There is some welcome mitigation in that most of these assets will qualify for instalments, so you are looking to raise only a tenth of it in the first six-month window and then you have to pay another nine instalments of the remaining amount.” However, she cautioned, “The family business element is a challenge because there will not necessarily be a ready market and you are not looking to bring in external investments and other shareholders, so that will be quite challenging.”

Ford provided a worked example of a £10 million trading company with a £2 million inheritance tax liability: “We worked out that you would need to dispose of assets within the company of £4.5 million, on which you would then pay a capital gain and there would be corporation tax due on it first. You would then have to pay a dividend out to the estate, which is then taxable income for the estate. To end up with net £2 million to pay the inheritance tax, you would have to take £4.5 million out of a company worth, say, £10 million.”

Chamberlain noted, “If you have to pay the inheritance tax out of dividends from the company, your effective rate goes up to about 34% rather than 20%.”

Succession Planning and Transitional Relief

Baroness Bowles asked about the preparedness of farmers and business owners. Doran replied, “It is not easy at all. The advisers that would be involved include your estate planning, valuers and a range of specialists that need to be involved in that conversation who do not necessarily work in the same firm, so there are lots of conversations between different businesses.”

Chamberlain highlighted the plight of older farmers: “If you have an 80 year-old farmer who is not married, whose wife has died, who has been reckoning on getting IHT business property relief at 100% and who has not made any lifetime gifts because he did not see the need for it, he is in quite a bad state.” She suggested, “It is perhaps worth thinking about a transitional relief for people who are elderly and are not going to survive seven years when they make gifts.”

Thornley commented, “If the sole goal of this is to raise more inheritance tax and to raise tax as a collection, then the cliff edge is effective. If you want to encourage succession—businesses do need to be passed on and succession is better and more effective in life—then having a longer period for people to let succession happen would help us preserve more businesses.”

Behavioural Change and Policy Rationale

The panel was asked whether the changes were already affecting behaviour, for example moving assets out of their pension into their personal hands to get APR and BPR. Ford confirmed, “It is definitely being looked at. Typically, pension funds may hold the trading premises of the sponsoring company, so we are aware that pension funds are looking to get those assets out of the pension into some other form of ownership and looking at where they can maximise their reliefs.”

Chamberlain reflected, “A lot of people see their business as their pension of course and that is what they are looking for, in some cases anyway.” She added, “It is surprisingly complex for quite small businesses, so once again we have a change in policy that probably adversely affects the small and medium-sized businesses much more than the larger businesses. That is one of the problems.”

Communication, Guidance and Consultation

The panel called for better guidance and more flexible policy. Ford said, “I think there is an education exercise there for both accountants and business owners that HMRC could do.” Chamberlain suggested, “Maybe you could have better guidance and clear examples. There are some complexities in the legislation that could be sorted out without losing revenue.”

Thornley noted, “The misunderstanding that I have seen, having gone out to lecture on this, is that a lot of people have heard that once you have exceeded the £1 million it is an effective 20% rate of tax. I think what they have heard in their heads is, ‘Oh, right, it is £1 million and then it is 20% of tax’ and it is not. It is an effective rate and the maths does not work if you just assume it is a 20% rate.”

On consultation, Ford said, “The APR and BPR consultation in January had a very narrow scope. It was worded specifically towards trusts, but it does of course affect all farms and businesses over £1 million.” She added, “The only concession that we have had, based on all the recommendations and suggestions made across the bodies, was that the £1 million allowance would be uplifted for inflation from 2030 and another small concession in relation to Scottish leases. That is all that we have at the moment.”

Chamberlain was critical of the policy’s rationale: “If the policy is going to raise only £500 million and people can take action to stop it anyway, which I think was what one of the Ministers said, and it is not going to be an issue because you can do lifetime planning, what is the point of the policy? Why not just leave people alone?”

Concluding Reflections

The session closed with reflections on the wider tax policy-making process. Thornley commented, “There are lots of positive elements in it; it talks about moving faster and being more agile, rather than the somewhat turgid regular cycle of things. The problem is that they say they would like to consult more informally; that is great if you are the body selected to be consulted informally, but we do not know who has been selected and who is consulting.”

Doran added, “For us, what is missing from the tax policy-making approach published in June is that there is no clarity on how regional needs are considered. You have four different countries in the UK. They are not homogenous in nature. They are all very different economically, socially, in terms of income levels and so on. I think that has been missing.”

Chamberlain concluded, “This is a relatively minor change in the tax system. We know it is not going to raise that much money. The complexity it has generated both for the Revenue and for practitioners is quite startling and it shows that our tax system is quite dysfunctional and we perhaps need to stand back a bit on tax policy before we introduce yet another little change into the system.”

The Chair thanked the witnesses for their “great value” and noted, “There is plenty to reflect on there and even some possible conclusions to come out of them.”

This report is based on the transcript of the session which can be read here. Please note that this is an uncorrected transcript and neither peers nor witnesses have at the time of writing had the opportunity to correct the record so it may be subject to change. The first draft of this report was produced with assistance from Microsoft Co-Pilot but it has been checked, edited and added to.