House of Lords inquiry: Business and farmers warn of unintended consequences from IHT changes

Below you can read a summary of both sessions. To download the full transcripts, please click here.

Session one witnesses:

• Natalie Butt, Director, Private Clients, Crowe UK LLP
• Steve Rigby, Chair, Family Business UK
• James Brougham, Senior Economist, Make UK

Awareness of proposed changes amongst farms and HMRC’s role in raising awareness

The panel agreed that while general awareness of future changes exists among private business owners, a detailed understanding is lacking.

Steve Rigby added, “In a large or medium-sized family business, which are the most affected by these potential changes, BPR is probably one of the most important taxes discussed around a board table”. He suggested that, among families, the understanding of this is ‘very high’ but “they are still working through those changes”.

Two panellists highlighted the need for HMRC to improve outreach, especially to trustees and SME owners. James Brougham recommended, “They need to be looking at one-page flow diagrams, decision diagrams and things that they can identify with and see”. HMRC should be working with organisations such as his to provide roadshows and webinars to inform individuals about the changes.

Natalie Butt emphasised that: “Trustees need to be made aware as well, especially if their only asset within the trust is company shares or business assets and they have no liquidity to pay that tax”.

Succession planning and investment challenges

The panel described significant anxiety and ‘inertia’ among business owners regarding succession planning. Butt observed: “Our younger business owners are taking the opportunity to be able to insure the tax liability. … Our older business owners are finding it very difficult to make a decision in relation to this. From our point of view, we are seeing people who are really worried about what they need to do and that fear is stopping them from making decisions.”

Rigby explained: “Talking to many family businesses, people are in somewhat of a panicked mode. … We are seeing some businesses reacting quickly because they feel they have to. … We are also seeing people who are just worried”, adding in the latter situation, ‘inertia sets in’ and the businesses stop investing and employing people. Brougham echoed the impact on investment, adding “making those rash decisions in the short term… may be not for the benefit of that business in the long term or the jobs it supports”.

Asked about tangible evidence of delayed investment, Brougham cited internal data and reported that “around those announcements in the Budget, 47% of manufacturers said that the changes announced in the Budget would increase the likelihood of them selling their business to a third party with concern to the changes to BPR. Some 31% said that they would stop growing the company to reduce their tax bill… 23%, so effectively one in four, said that it would have no impact on their business either way.”

Rigby also referenced a CBI survey that estimates about a £15 billion Gross Value Added reduction and a loss of 208,000 roles.

Impact assessment and double charge concern

The panel criticised the lack of a government impact assessment. Rigby stated, “Unfortunately, there was no impact assessment undertaken by the government. … Despite the fact that we have what we think is reasonably strong empirical data pointing to meaningful impacts that will be a net negative on tax receipts, the government have chosen not to listen to that.”

Brougham added, “We think that the capital-intensive nature of manufacturing in our sector has been underestimated in those costings”. He believed that the behavioural effects of this change might have been underrepresented, particularly around delayed investments.

Butt highlighted the impact on the ‘mental’ health of business owners, saying: “There is definitely a need to try to squirrel money away as quickly as they can, because they fear that their family will not be able to pay the tax bill if something happens to them”.

A concern was raised regarding whether executors face a double tax charge when they need to pay tax on the asset value of a company. Butt acknowledged the issue, explaining that it is practically ‘impossible’ to extract sufficient profits from a company within 10 years to pay the required tax, especially through dividends, due to additional income tax or other tax rates. She suggested that this often forces the sale of other assets, as selling shares back to the company is generally undesirable for family-owned businesses wishing to retain family holdings.

Rigby agreed, highlighting that extracting funds by dividend can result in total tax rates in the mid-30% range, which “eradicates any inheritance tax relief”. He added that share buybacks require proof of hardship and are subject to the untested 10-year rule, making the process hard.

On the reliability of HMRC’s estimates regarding the number of companies affected by new regulations - given that HMRC does not collect data on business values and does not request such information - Rigby explained, “We look at the size of the medium-sized sector and the large sector. The large sector under current rules is above £54 million of revenue. There are only about 700 family businesses of that size, so it is quite small. The rest fall within the medium-sized companies”.

Valuations and liquidity

Valuation disputes and liquidity risks were recurring themes for the panel. Butt said “there are not enough staff at the Revenue to deal with share valuations already”. She explained that historically, if an individual had an asset that was going to qualify for business property, they did not need to give a value because there was no need to. “You would put whatever you felt like and, as long as it met the tests, everybody was happy”, she added.

Brougham foresaw a lot of disputes, particularly around plant and machinery. He said that a robotics unit might cost £2 million or £3 million, but the residual value of that on the market would be much lower.

Rigby raised concerns about the valuation of family business shares, highlighting that, “Often in articles of association family members are only permitted to offer the shares first to the family, so you have a closed market to start with in that situation. How does one value that?” He warned, “I fear that we are going to have a horrendous litigation environment where family businesses are incentivised to litigate against their value. In that process, clearly the fees are going to be astronomical for UK government.”

Rigby further suggested that one thing the government could do to make things easier is “a zero-sum game alternative, which allows for the company to bear the liability on behalf of the individuals, if the company elects to do so, and to spread that cost over a 10-year period”.

Brougham saw “a gargantuan liquidity risk. Even with that 10-year interest-free period”. He believed that bridging liquidity would be ‘necessary’, suggesting that the average cash flow position of SME manufacturers within the sector is ‘overestimated’.

Wider economic impact and transitional measures

The panel expressed concern about the broader impact on UK supply chains and regional economies. Brougham warned that if a family business decides to exit a supply chain, or liquidate the business, “the subsequent secondary effects for our manufacturing supply chains in the UK are likely to have been underestimated significantly.”

The panel proposed several transitional measures. Butt suggested, “There could be some support for our older generations of business owners who may be 80, 85 or 90 when the rules have come in. There could be some concessions for those who do not have the time, or maybe the capacity, to be able to make any changes or do any planning.”

Brougham recommended that in the 2026-27 tax year, the allowance should be a “one-off £2 million”. “That is to soften the blow while maintaining the government’s stated policy objectives for those much larger businesses, just for those that have potentially not kept up to speed.”

Rigby advocated for those over 74 to have a different set of rules in place for a period of time to allow them to get their affairs in order.

Seven-year rule and government engagement

Asked about the behavioural change if the IHT seven-year rule was taken away, Rigby observed that “we have seen some members transitioning either to trust or gifting”, but said that the number was lower than expected due to the emotional difficulty. “Sometimes financial decisions are overtaken by emotional decisions in terms of the ability for one to make that decision quickly,” he added.

Rigby also highlighted the narrowing options for trust transfers, arguing that the “window is very narrow now for that to happen,” and lamented the “shame” of losing “the benefit of professional trustees and the other protections around marital and those types of things that come in a trust structure.”

If the seven-year rule were removed, Rigby warned, “we really are in a situation where we are forcing the hand of sale. If there is no other way out and you are facing a very large liability, the prudent thing to do at that point is to consider selling your business. It is a real shame to put our family businesses in that type of peril.”

Session two witnesses:

• Tom Bradshaw, President, National Farmers’ Union (NFU)
•  Jeremy Moody, Secretary and Adviser, Central Association of Agricultural Valuers (CAAV)
• Judicaelle Hammond, Director of Policy and Advice, Country Land and Business Association

Challenges: six-month probate and valuation

The second hearing opened with a discussion about the challenges for family farms on IHT within the proposed six-month window. Tom Bradshaw believed that liquidity is a big challenge for family farms facing IHT bills. “To expect to have probate within six months is completely unrealistic, especially given the complexity of valuing an agricultural business”.

Bradshaw explained: “If, in that period, you have to raise liquidity, you would not have the asset to dispose of. You would not actually have the asset to borrow against”.

Asked if the proposal to pay the tax in 10 interest-free payments over 10 years is not helpful, Bradshaw replied that it is interest-free only if the individual makes the first payment.

Judicaelle Hammond agreed that the requirement to make the first payment within six months was problematic, saying, “There is a real circular problem to the issue of getting cash out of the business, or the estate, before you have grant of probate. There might be a theoretical situation where the executors, who, by the way, may not be the beneficiary… could have to take a bridging loan on behalf of the estate”. She described the situation as ‘awfully complicated’.

Jeremy Moody agreed, and explained that:, “It is not the valuation office that would be doing the valuation. It would be the taxpayers, so the deceased's valuer who would be undertaking that and submitting that as part of the larger return for inheritance tax”.

Moody highlighted the expanded scope, saying: “For the first time since 1992, we are talking about livestock… machinery… silage… stores. We are talking about a subject that has been lurking in the undergrowth since 1992, when it was beginning to come out, of course, which is non-assignable tenancies, and all sorts of other issues. Since then, we have developed the whole world of farm diversification to be considered, so there is a great deal more that falls to be valued in this.”

Asked how long it is taking on average to agree on valuations, Moody explained that it depends on what is in dispute. He suggested that on the whole, on capital gains tax, “there is rather less in dispute than for inheritance tax, particularly with the various objective tests that you have for agricultural property relief, which make it a particularly thorny area”.

The panel questioned whether the six-month window was fair, especially given the time required for HMRC to respond. Moody suggested, “It would be good if you reached the point where there was an agreed valuation on which the game could then be played”. Bradshaw said that getting to a point of valuation from death is months, not weeks.

Preparedness of farmers and the ‘forestalling clause ‘

While awareness of the changes was high, preparedness was variable, said the panel. Hammond explained that it is hard to advise on specifics without having seen the legislation. She categorised farmers into two groups: “Those who are taking action and those who are putting their heads in the sand and hoping that this will go away or that they will have enough time to do something”.

Moody added, “There is a process of analysis and a process of discussion, which can be quite hard in some families… 33 years of ‘holding it until you die’ as a viable tax strategy has reinforced every British instinct not to have conversations.”

The forestalling clause leaves some “deliberately trapped” and unable to plan, especially the elderly and terminally ill, said Bradshaw. He said the previous weekend’s BBC Countryfile had had an example: “The grandfather, who is fifth generation, has farmed on that farm for over 70 years. He was diagnosed with cancer in February and has considered not accepting treatment because he feels he would be better off not being here in April. That is an absolutely tragic situation to put anybody into. If the forestalling clause was not there, he could have gifted. If he had died within the seven years, it would have come back into the estate and APR would still have applied. There is a trap that has been set, which is absolutely unforgivable and which penalises the elderly”.

Spousal transfer and government estimates

The lack of a transferable allowance between spouses was highlighted as a major flaw. “So much at the lower level of the small and medium farm would be helped by having that threshold for spousal transfer, avoiding those choices and avoiding the inefficient use of the reliefs,” said Moody. He referenced a CenTax study which said that it would not cost the government overall very much over time, but it would be enormously helpful in terms of families dealing with this.

Removing the clock for lifetime gifts to the spouse “would make some of this reasonably user-friendly in ways that do not break… the principles of what is at stake, but allow for some practical delivery on the ground so that we can do sensible planning without undue complication,” he added.

The panel disputed government estimates of how many would be affected. Moody stated, “The figures that the government produced at the beginning simply smelt wrong. All three organisations here did our own independent assessments of what we thought in terms of people exposed… we all came up with larger figures”.

Hammond labelled the government estimates as ‘extremely reductive’, while Bradshaw added, “We came to the fact that 75% of farming businesses were impacted by the changes and would have to take action to avert the impending tax decision.”

Affordability of the tax and lack of consultation

The panel emphasised that farms are “asset-rich and cash-poor.” Hammond expressed concern about the ‘affordability of the tax’ for farmers, saying, “To imagine that there is liquidity in the business is a fundamental flaw of the policy. That is a particular difficulty that, try as we might, we have not quite got the Treasury to accept or listen to.”

Bradshaw said the farm in Countryfile’s case study “was 360 acres that family within the partnership had. It was going to trigger a £1 million liability and would be 20 years of profit. Ten years’ interest-free is one element of this, but it would be 20 years being reinvested solely for the purpose of paying a tax liability.” 

The panel criticised the lack of consultation and questioned the policy’s intent. Hammond called for more consultation, particularly on the practicalities. She argued that the sector was not given an opportunity until the draft Bill emerged to comment on how it is going to work, and the difficulties that need to be addressed.

Bradshaw described the “clawback proposal” put forward by the sector, saying: “Rather than the inheritance tax bill being triggered on death, it would be triggered on the sale of the asset if that was in a seven or 10-year period after the inheritance of the asset. Effectively, when you turned the paper wealth into real wealth, you would be taxed on it. That was point-blank refused, but [the government] have never been willing to share the analysis, which they stood at the Dispatch Box and said they had done”.

On the intention of the policy, Moody concluded “This is designed to hit those it claims to protect, and it protects those it claims to hit”.