Inheritance tax rises and the Budget: who's affected? | IFS Zooms In

In the recent budget, Chancellor Rachel Reeves announced a £40 billion tax increase, pushing tax as a share of national income to an all time UK high.

Just 6% of that came from an increase in inheritance tax, and just a small fraction of that will come from farmers. And yet it is the tax increase on farmers that has dominated the news headlines. But beyond the change to agricultural reliefs, there were some other big reforms as well - to pensions and business reliefs.

So to discuss how inheritance tax actually changed in the budget, who will be affected and whether it was a good idea, Paul is joined by Helen Miller and David Sturrock, colleagues at the IFS.

00:00 Introduction
2:01 What is inheritance tax
4:23 What do other countries do?
6:40 Why is inheritance tax unpopular?
10:30 Threshold freezes
13:55 Changes to treatment of pensions
19:52 Farms
24:22 How many farmers will this affect?
27:40 Impact on family farms
33:20 Changes to business reliefs
35:28 Impact on businesses
41:30 Inheritance tax avoidance
45:36 Conclusion

[InstituteforFiscalStudies]

Timecodes:
00:00 Introduction
2:01 What is inheritance tax
4:23 What do other countries do?
6:40 Why is inheritance tax unpopular?
10:30 Threshold freezes
13:55 Changes to treatment of pensions
19:52 Farms
24:22 How many farmers will this affect?
27:40 Impact on family farms
33:20 Changes to business reliefs
35:28 Impact on businesses
41:30 Inheritance tax avoidance
45:36 Conclusion

[Leapops]

My Mum passed away recently. There was no IHT to pay. However, the IHT process, even when there is no tax to pay, is a bureaucrats wet dream. I had to fill in over 80 pages over 13 different forms just to show HRMC there was no tax to pay. Then wait for 16 weeks for probate office to do their thing before being able to sell her house etc. I do wonder if the admin costs of all of this are included in the calculations of how much IHT raises. Someone at HRMC had to check over those 13 forms and I suspect they are on a bit more than minimum wage.

[radiantinred]

It's only recently pensions were a vehicle for "avoiding" IHT. The budget removed this IHT loophole for people who had probably been "middle income" earners but the loopholes for the "really high earners / rich " remain. It doesn't make a huge amount of sense.

[PaulNaybour]

I run a small private business that will need to pay inheritance tax. So if I die the only option is to close the business if my children can’t find a buyer to fund the inheritance tax. What happens to the employee jobs.

[EmmaJonesRussell]

We can debate whether it is more or fewer than 500 farms a year that will be affected. However, I do not understand this argument beloved by the government that only X number will be affected, so therefore it’s okay.

Is it okay to cause potentially 500 farms to be made unviable each year? Let’s say, it’s only 100. Is that okay? Let’s say (like the National Farmers’ Union) that it will be more. Would 1, 000 farms being made unviable each year be okay? Whatever the number is, I don’t see how a policy that raises so little money can be justified by saying that it will only destroy X number of farms per year.

[mthw]

There is one very easy change that would make IHT seems much less unfair that you didn't mention. Currently HMRC demands you pay your IHT tax bill within 6 months of the date of death. If you don't, then interest is charged. Having just gone through the process, it would feel much fairer if this time limit was removed and instead the tax is payable at the point probate is granted. The grant can then be tied to the tax being deposited. Currently probate can take a year or more, and without it there are restrictions of what you can do with inherited assets (including restrictions on selling them to help pay the tax bill!)

[malonetv]

Thoughtful discussion as always. I know it's a cliche but this stuff should really be taught in schools. It's frustrating how often politicians have to make inefficient decisions just to appease a poorly educated population.

[Rockies-alps-lakes]

You’re talking about food security as though food is an infinite resource that can just appear!

I really do appreciate the discussion because any information is essential to forming a balanced argument to make our country a fairer and more profitable place. However, I feel there is a lack of understanding around your concept of the value of farms. You clearly have no idea about the business of farming and have swallowed the numbers put out by the goverment.

Context: I’m a fifth-generation farmer, so obviously, I’m going to have some bias.

Suggesting that land, because it is more profitable for solar generation (not farming) or for businesses to offset carbon, should be considered for these alternatives. While it is undeniably more profitable, this perspective assumes society can survive solely on numbers generated by a calculator. If that were true, you’d be correct. But the nation can’t. Currently, the UK produces 60% of its own food, and this figure is expected to drop next year due to weather and the significant amount of land taken out of production for environmental schemes. (It’s a lot! These schemes are more profitable, especially when you don’t have to pay National Insurance contributions to staff the larger farms.)
The Treasury’s numbers don’t stack up. Any viable farm is worth over £3 million—not just for the land but for the assets too. A cow is an asset. A tractor is an asset. A quad bike is an asset. It’s not just about the land and the home; it’s everything we work for. Unfortunately, the UK does an excellent job of devaluing the price of our produce with imports we can’t compete with (a topic for another time). As for arable farming, the machinery costs are immense—a single tractor can easily cost £250, 000. The value adds up quickly. I think the treasury has forgotten the farms used business relief for its business and APR for the land and buildings.

We are a hill farm in the Lake District. I’m 35, and my father is 71 (the average age of a UK farmer is 60). The average house price in my local village is £700, 000, but the value of our home, land, and barns here does not reflect the viability of our business. If you factor in machinery and stock, even we are around the £3 million threshold. This value won’t decrease because of our location.

I’ve heard arguments against large landowners, which I don’t agree with. Part of our farm is tenanted. The landowners are old aristocracy who have owned the land for over 500 years. This gives us security, knowing that whenever a lord dies, we don’t need to worry about a sell-off of the land. They think in terms of generations, not a quick profit. That long-term perspective is reassuring to a rural economy. Obviously, they have tax planning in place, but what if one dies unexpectedly without the required seven years' notice? This uncertainty applies to us and our landlord. I doubt either of us could pay the inheritance tax bill. The money in agriculture simply isn’t there—fact. And now, we have until April 2026 to sort it out. I hope my father lasts longer, but what if he doesn’t? Farms don’t generate enough revenue to pay such a tax bill, even with 10 years’ grace.
We farm close to 250 acres year-round, with access to another 400 acres of fell in summer. We are custodians, managing the land for some of Britain’s most endangered species. I’ve heard some crazy ideas from postgraduates in environmental science about encouraging wildlife, but they often fail to consider that location matters. I know where the land floods and where the grass burns in summer. Timing is everything! I’ve worked for large companies and attended meetings where productivity is hindered by office politics and indecision. This is why small family farms are so effective. I discuss plans with my father and brother, and we get things done. None of us wants to ruin things for the next generation. We adapt!

The question is: For food security, do you want to take the risk in an uncertain world? Do you want to be the ones who say, “Sorry, we can’t feed you because we sold the land to EDF or Lloyds (who are buying farms) and covered it in solar panels?”. This is not an industry our nation can live without (its not a iPhone we make). Do you want to trust it to the likes of big business?

The idea that someone would spend more than £3 million to buy a farm and actually farm it is unrealistic, given the low returns. Instead, more farms will be bought by wealthy individuals who take money from environmental schemes without producing food. Not to mention the government is incentivising not farming over environmental schemes to hit net zero. Another consideration: What happens if we have to sell the farm? I’m already looking for other work, and it’s difficult due to our rural location. Jobs simply aren’t available here. Add in more displaced farmers—people who have only ever known farming—and the mental health consequences will be devastating.

This is an ill-thought-out plan for a quick profit that will cost more in the long run. The timing is deliberate, targeting an ageing farming population. As for farms bought by people avoiding inheritance tax, I don’t have an answer. But that’s life—there will always be winners and losers. The challenge is finding balance. And none of this will matter if the nation starves. That’s what’s at stake, as agricultural policy remains baffling and a disaster.

[fastestkid]

IHT raises so little, causes so much grief, is totally pointless with so many reliefs which just funds a tax planning industry. Distorting farmland prices etc Just abolish it and save everyone wasting time, HMRC can spend what little resource of the regular set of taxes. Apply CGT at some rate or set of rates, indexed for inflation. Stop wasting time & energy.

[michaelgilday]

I think you need to watch Harry's Farm on this topic as he explains how this will affect generational family farms.

[ianhodgson]

This all seems to make a very good case for abolishing IHT altogether or at the very least having it at a very low rate (say 5-10%) and abolishing the exemptions.
I also take exception to the panel glibly stating that "it's only a few hundred people who will be affected". I am not a farmer, but I was brought up in a farming community. If I were one of those farmers, getting up at the crack of dawn to look after my animals, working 7 days a week, 52 weeks a year, struggling to keep my family farm afloat, hearing 3 highly educated individuals on a secure salary telling me that having to sell off the farm to pay IHT is OK because we're inefficient would really p*** me off! A bit of humility please!
Economists considering only the big picture, and politicians who only care about issues that affect a large part of the electorate are conveniently forgetting the impact on the individuals involved. If you are one of those affected you must be in despair that so few of those in power or positions of influence actually care about you as an individual.
The same comments apply about owners of family businesses built up over the generations. Politicians and those providing them with advice don't seem to care about the impact of their policies on the "little people". Paul, please remember the effect of policies on the individual.
I'm sorry about the rant, as I enjoy most of the content of your output from IFS. Much of it makes great sense and has much to recommend it. But please remember that an economy is made up of and is sustained by the efforts of all those people "grafting at the coalface"!

[simonm]

I think they really underplayed the upcoming increase in the percentage of estates that will pay inheritance tax in future. The freezing of thresholds (yet again!) is one big reason but they didn’t really quantify the impact of the (understandable) inclusion of DC pots inside estates. The previously quoted “only 4% of estates pay” was superseded by the Chancellor who quoted 6% of estates paying in the latest figures. I suspect the number will be close to 20% by the end of this decade. In the South, house prices will raise this even further……

[EmmaJonesRussell]

It seems to be a bit of a bizarre argument that farmers and other business owners can just plan around this. If there are ways to plan around it, then what is the point in making these changes? It is only going catch out those who are too elderly or too sick to have time to do the appropriate planning. In other words, this becomes a tax on the frail. One solution would be to delay the introduction of these changes for seven years. This could be a convenient way for the government to escape from whole problem in any case, rather than making an embarrassing U-turn.

[nigelbradshaw]

IHT has needed an overhaul for a long time, so that everyone is treated fairly.

I always recall covering the 5th Duke of Westminster who died in 1989, his estate was valued in excess of 5 billion but was only valued at 5 million for IHT. This was because of the large value of property held in trusts and the woodlands exemption. His successors have also benefited from this which seems inequitable. That’s without considering that not all wealth is earned by all, some wealth has been directly bequeathed from the monarchy to families, in lieu of their allegiance.

The recent change to incorporate DC pensions also seems inequitable without considering the treatment of the different assets. Those in or preparing for retirement use pension pots to fund their living, with the inherent associated investment risks, whereas illiquid assets such as property are treated the same for IHT. A banding for each seems more equitable.

[leighgoodwin]

Paul - I think that you almost brought yourself to say the logical thing - IHT should be abolished, and the UK should focus on taxing income properly. If this means higher marginal rates then so be it. But IHT, like CGT, will always require special treatments and distort decisions.

[AlanTimpson]

Helen made an argument about distorting the ownership of businesses. However, reducing APR and BPR relief will actually the most powerful factor distorting the ownership because it will mean that companies that are on the stock exchange or owned by private equity have a massive advantage over family businesses. Family businesses will suffer losing a significant chunk of their capital every generation. Public businesses and those owned by private equity will not suffer losing a chunk of their capital every 20 to 30 years. Reducing APR and BPR relief is unfair on family businesses.

[OneAndOnlyMe]

Will miss Paul, he's been a great voice for the IFS (as soon as you hear him, you know it's the IFS!) and a excellent voice for policies that are fairer in the round.

[asgggg]

Can someone please talk about the biggest exception to the inheritance tax, being the monarch. The British people should demand that the monarch pays inheritance tax like the rest, the broadest shoulders…

[FClass]

Just to add a note here that I haven’t seen anyone else mention regarding IHT (Inheritance Tax) allowances:

An individual has a £325, 000 IHT-free allowance.
In addition, they have a £175, 000 IHT-free allowance specifically for property.
This means a couple can have a combined £1 million IHT-free allowance. However:

If the total estate is worth over £2 million, for every £1 above this threshold, the property IHT allowance starts to reduce.
For example, if the total estate is valued at £2.35 million, the £175, 000 property allowance per person (a total of £350, 000 for a couple) is entirely lost. In this case, the couple would only have a £650, 000 IHT-free allowance remaining.

Therefore, claiming that farmers have a potential £3 million IHT-free allowance can be a bit misleading.

[richardrees]

It appears the Labour government have redesigned the inheritance tax exemptions re agricultural relief as an attack upon rural Britain who have little understanding of the impact, as per the recent DEFRA intervention to the Treasury, because the assets are not often realised by those who own / inherit them and it’s not only the farmer affected but those businesses who are dependent upon farming, re machinery dealers and agricultural agriculture merchants.
Also the figures of who will be affected are distorted as per all the inheritance tax figures because the thresholds are being frozen whilst the assets are increasing in value, the stealth tax approach which political parties are now taking.
The inheritance exemption for agriculture was brought in because the margins on the value of their assets were so low it was only families and their emotional attachment to the asset who would continue to run a business with such poor returns, family farms are inefficient because they often take an income which is relatively low, margin on a 500 acre farm is likely to be just over 50k when the assets are in excess of 6-7 million.
It will also not affect those who it is claimed the changes are targeting re car journalists and vacuum manufacturers because they will employ tax avoidance measures which is why they bought agricultural land in the first place. Perhaps those wealthy landowners affected should declare themselves to be a monarch of their land and avoid tax like the Duchy estates, but that’s an altogether separate question which should be debated if the country needs wealthy individuals to pay more tax!!