Labour’s not for turning but the Inheritance Tax battle will rumble on
Civil servants and politicians could not believe their eyes. As the hoarse grumble of diesel motors thundered along Whitehall, a fleet of tractors descended onto Parliament Square, heralded by a cacophony of honks to the tune of Aqua’s Barbie Girl.
Beginning in November, farmers marched to Westminster to protest the government’s inheritance tax (IHT) reforms. Even TV presenter-turned farmer Jeremy Clarkson joined the campaign.
Changes to IHT – or, “death tax,” as it’s known amongst its critics – were introduced in the Autumn Budget.
These changes, due to kick in in April next year, will eat away at the relief a number of businesses and farms had been eligible for.
Only up to £1m of farming and business assets will be fully exempt from these taxes, after which the relief will be slashed to 50 per cent.
Tories’ sustained attack on IHT
The crux of the controversy lies in claims that the tax encroaches unfairly on businesses and farms that are small, family owned, and part of the “fabric of the community,” Adam Craggs, head of tax, investigations and financial crime at law firm RPC Law Firm, told City AM.
Just last month, the National Farmers Union (NFU) published an open letter to Chancellor Rachel Reeves calling for the measure to be retracted. NFU President Tom Bradshaw said “the family farm tax is … unfit to become legislation and is triggering a crisis of confidence across the farming sector.”
The Tories have dubbed the IHT as “punitive” and anti-growth.
Yesterday, Shadow Business Secretary Andrew Griffith said the policy “will carve up successful enterprises as they are handed down to the next generation,” and is just one in a series of policies targeting businesses and deterring long-term investment and planning.
Griffith also promised that his party would reverse the “vindictive” tax at the first opportunity, as these taxes punish “risk takers and wealth creators.”
The Confederation of British Industry’s economic consultancy arm, CBI Economics, found the tax could cost the UK 200,000 jobs, and, instead of raising £1.8bn in tax revenue – as promised – would instead have a net fiscal cost of £1.9bn.
Tory MP Edward Leigh said: “I understand why they want to claw back money from big estates, or from people who buy farms just to avoid inheritance tax – not Jeremy Clarkson of course; he is a fantastic chap – but I cannot understand why they are focusing on family farms.”
In 2021, Jeremy Clarkson said avoiding inheritance tax was the “critical thing” in his decision to buy a farm, though he backtracked on this statement in 2024, according to the BBC.
In defence of the tax
Ministers insist most businesses and farms will still remain untouched by these reforms.
A Treasury spokesperson said: “our reforms to Agricultural and Business Property Reliefs will mean three-quarters of estates will continue to pay no inheritance tax at all, while the remaining quarter will pay half the inheritance tax that most estates pay.”
Treasury Minister James Murray claimed that while IHT “advantages” for owners of agricultural and business assets will be slashed, those assets will still be taxed at a “much lower” effective rate of 20 per cent compared to 40 per cent charged on most other assets.
Murray added that they “made sure that generous tax reliefs still existed in the tax system precisely because we want to continue to support small and family-owned farms and businesses in particular.”
“Payments can also be spread over 10 years, interest-free. This is a fair and balanced approach which helps fix the public services we all rely on,” the Treasury spokesperson told City AM.
Key reliefs will be retained, but the government will “better target them, as it is not fair or sustainable for a very small number of claimants each year to claim such a significant amount of relief,” according to the Treasury.
The IHT reforms can also be couched in the wider context of the Treasury grasping to fill the so-called “£22bn black hole” in public spending the government claimed it inherited, which Chancellor Rachel Reeves invoked once again in her speech on Tuesday.
The government expects to rake in £500m a year through these reforms, though the Confederation of British Industry analysis projected they would instead cost the Treasury £1.9bn by the end of the decade.
‘Labour u-turn is unlikely’
Despite Labour garnering a reputation for reversing unpopular policies under pressure, Craggs said “while the proposals remain at the consultation stage, a full U-turn seems unlikely. The Labour government appears committed to reforming what it sees as a generous relief.”
However, arm-twisting by professional bodies like the ICAEW, as well as by small business owners and farmers, could lead to amendments, Craggs said. These might look like introducing “transitional reliefs, tapering for the elderly, or inflation-linked adjustments.”
Disrupting the line of succession
The tax is also criticised for disrupting succession plans that are often decades in the making.
“The proposals have struck a nerve because they target long-standing, multi-generational businesses, many of which are asset-rich but cash-poor,” Craggs said.
According to Craggs, “elderly business owners, especially those in ill-health, may struggle to restructure their estates before the changes are implemented.
“The threat of businesses being sold-off to meet IHT liabilities risks damaging local economies and the fabric of rural communities.
“The reforms not only jeopardise family businesses but also introduce instability into a system that has, until now, provided business certainty.”
Lib Dems are aligned with Tories
IHT reforms risk “ringing the death knell for local farmers and the small businesses who rely on them,” the Lib Dems said.
While the Lib Dems, led by Ed Davey, might appear to be on the same page as the Conservatives, they are keen to assert their independence on this issue.
“After years of the Conservatives taking rural communities for granted, it is deeply disappointing to see more of the same from this new government,” the Lib Dems added.
Lib Dem MP, Steff Aquarone, told City AM: “it’s a stretch to say that IHT in general is bad for business, unless it creates an existential threat because of sudden changes impacting a specific sector, like farming.”
“The specific nature of asset ownership – established over many decades of consistent treatment – is that land and other assets don’t change hands until death. The farm might get “‘handed over’ before, but unlike other businesses where the next generation might be awarded shares, directly or indirectly, in most family farms the actual asset stays with the older generation until death.
“It’s this fact – the sudden cost of inheriting the business for farmers now – plus the low profitability of farming, that makes the family farm tax so damaging,” Aquarone said.
‘Do away with IHT entirely’
Reform UK has opted for a more radical approach: scrapping IHT entirely.
Polling for City AM has found that just over 60 per cent of Reform UK voters cite the policy as grounds for their support.
Nigel Farage, leader of Reform UK, has said “it hits people at the most unpleasant part of their lives,” adding that “they’ve just lost their parents, and suddenly the tax man is after them.”
Deputy Leader Richard Tice called IHT a “double tax.”
“People pay tax their whole lives only to be immorally charged when they die,” Tice told City AM, reiterating Reform’s promise to abolish the “cruel and unfair” tax if they win the next election.
Scrapping the tax entirely would lead to a loss of £9.1bn to the exchequer, representing a little under one per cent of the total government budget.
Piling up paperwork
“This reform is likely to lead to an increase in intrusive and protracted HMRC enquiries and litigation before the tax tribunals,” Craggs said.
According to UK accountancy firm Price Bailey, HMRC is already racking up inheritance tax enquiries, seeing a third more in the past year compared to the previous one. This indicates that businesses are struggling to grasp the implications of the policies.
“Valuation … the prospect of double taxation, the timing of gifts, and arguments over active trading status, will all become fertile ground for challenge,” Craggs said, adding that “at a time when HMRC is already stretched, the risk of delay and inconsistency in enforcement will only increase.”
In addition to onerous paperwork for HMRC, families and businesses could also find themselves stretched in years of litigation.
It seems likely that opposition to the policy will endure for a similar length of time.