Question about the farm inheritance tax changes - why can’t farms be passed down to their family like a company changes CEO’s?
Posted by AccomplishedDinner55@reddit | AskUK | View on Reddit | 28 comments
Hey sorry if this is a dump question - I’m curious about the changes to inheritance tax in farms, with the subject being on the news, and I’m wondering if anyone else here has had the same thoughts
I’m wondering why farms cannot change the way they operate and make the head of the family “CEO” put the farm and assets into a trust and then change “CEO” to be the next in line of the family to operate the farm before their death? Doesn’t that mean that there would be no inheritance tax levied?
screwfusdufusrufus@reddit
I think we need to consider that most of these “farmers” are just landlords in wellies who let the land to the farmers.
Most of these guys know how to avoid tax. There are a handful of legit farmer/landowners who have been stung who shouldn’t be
No_Photograph_1626@reddit
I think the figure is actually 34%, which is why this policy is very poorly thought through due to the impact on the genuine farm businesses
screwfusdufusrufus@reddit
I can believe that.
The intent was to squeeze the parasites not the farmers, but it was a pretty blunt tool
ConsistentCatch2104@reddit
CEO’s don’t own a company. They are just an employee.
royalblue1982@reddit
I'm pretty sure that a farm can be passed to your children without tax with just a small amount of planning and a half decent accountant/solicitor.
The issue though is that rich people are using farmland for tax evasion and they're annoyed that it might be stopped.
No_Photograph_1626@reddit
It can if you have 7 years. Lots of us don’t because we are a bunch of old timers. Many work in their 80s and haven’t handed it down based on the best advice around the existing rules. Now they’ve changed we are up the creak and Rachel from accounts has taken the paddle
Careless_Mood_4708@reddit
You might be but the county will benefit
No_Photograph_1626@reddit
Well maybe one day they’ll come and take all you’ve worked for and passed to your children
AdCurrent1125@reddit
Even if this were a thing, farms have a peculiar financial characteristic.
99% of the value is in things that are not-money. So tractors, cattle and land etc. These are the things that make a farm capable of earning.
When IHT is applied to the non-cash things, you have to sell something to pay the bill. It usually means land coz you can't sell half a tractor.
That means next year you've got less land to earn an income. You're essentially taxed forever.
This is different to you and I inheriting mum and dad's house. That's not my income, or ability to earn an income. It's a nice bonus, so tax it.
No_Photograph_1626@reddit
200 acres will get you national minimum wage if you look at hourly rate. Machinery value on used market will still be 500k - 800k, then farmhouse probably 500k minimum. If it’s arable it’s easy 10k an acre. So if you are divorced or widowed (average age of a uk farmer is 58), that million quid coverage goes nowhere.
People outside of agriculture hear 3 million and put it in the context of a lottery ticket win, not a business that makes very, very little profit but provides UK food security.
Ask a farmer what they would do if they won the lottery.
Most would say ‘keep farming’
Paulcaterham@reddit
The fundamental issue is timing.
For a very long time, if not always, it didn't matter that granddad John owned the farm on paper, as it was always being passed down to his son James with no IHT to pay.
If it was a "normal" business, as grandad John aged and took less part in the business he would transfer his ownership to James. Who would carry on running the family widget making business, many years after the transfer of ownership granddad John would die. There would be no IHT to pay as the transfer of ownership happened well over a decade ago (7 year rule)
But there was no reason for a family farm to change ownership as IHT did not apply, so transfers of ownership didn't happen.
The fundamental problem with the new legislation is the amount of notice. If they had given 7-8 years notice, the family farm would be transferred to the next generation now, and there would be no IHT to pay in 10 years when granddad John died.
But that didn't happen.
And grandad John had a couple of health scares recently, and is getting on a bit. Grandma Jean died a couple of years ago, and he's not been the same since. The family knows that he'll be gone soon, and they have a £250,000 IHT bill looming on the horizon, and no way to pay it, unless they sell the South part of the farm. Land values are down too as it's not an IHT dodge for rich City bankers anymore. So a good chunk of the farm that's been in family for generations is at risk, and the farm doesn't really work as a business without that bit of land.
That's the reason
Not the principle - the timing - and the notice
Life_Put1070@reddit
This is a very good explanation of a rather sticky issue.
Can the inheritor not take out a mortgage/loan for the value of the tax, against the value of some of the land? I'm sure there are practical concerns with this (namely, what seems to be the unprofitable state of modern farming, though I am not sure I quite understand that myself). Also, I suppose if the value of the land is substanitlaly decreasing the banks may wish for more security than if you just sold it to pay the tax, which could be problematic.
Paulcaterham@reddit
Yes they could take out a mortgage, but when you look at the return on capital employed in a farming business - it is extremely low. Think 1-2%. So if you have to pay 20% IHT (or even say 15% after allowing for tax free allowances) and mortgage rates around 5%, the mortgage interest payments alone take all of the farm profit. Remember that farm profit is the salary of the owner.
They just end up working for the bank. Or the tax man. Depends on your point of view.
No_Photograph_1626@reddit
0.5% unfortunately according to the UK government. It has averaged that in the last 7 years of our business. The new IHT equates to about 10 years profit for most farms impacted by this. Certainly all my neighbours 3 farms in either direction
nfoote@reddit
Sounds like grandpa John needs to find himself an agreeable young wife, maybe someone who oh so recently divorced his son even though I'd imagine they'll get back together one day shortly after John's funeral.
StationFar6396@reddit
CEOs dont own the entire company. If the CEO did, then when they died, their shares based on the value of he company would be subject to Inheritance Tax like everyone else.
In fact, small business owners face the same problem, and when they die and their children inherit the company they pay tax.
Tax. Everyone owes. Everyone pays.*
Spank86@reddit
OK. So I'm sure there's a simple answer to this but company's can own their own shares right? Couldn't it own the vast majority of its own shares leaving a small % in the hands of the family?
MrNippyNippy@reddit
I don’t know the answer but I would suggest you’re missing the ownership of the farm/business/megacorp.
Say you become CEO of a UK Owned Corporation called Bobs Breast Implants. You’re not the owner - the shareholders are.
If I own shares of BBI and I kick the bucket, in my will I leave my shares to Betty as she’s an avid fan on BBIs products and been a very “kind friend” to me. Betty would need to consider inheritance tax depending on the value.
GetNooted@reddit
*Mr Biggy Nippy Breast Implants
AccomplishedDinner55@reddit (OP)
Hahaha, love the analogy very on point for your username - Ye, you’re completely right, but say that the “shares” / “financial ownership” is in a trust, not owned by anyone but controlled by the CEO of the company/farm, wouldn’t that mean you could pass control of the trust to subsequent family members without paying inheritance tax, I guess this would mean they wouldn’t be able to take out profits for non work expenses etc…I’m sure it’s a lot more complex than what I’m saying 🤣
1n4ppr0pr14t3@reddit
Trusts aren’t that simple, and aren’t a magic get-out-of-IHT bullet.
Mountain_Bag_2095@reddit
This is my understanding it’s the fact the shares are passed on so the estate in theory could sell some of the shares to pay IHT but that will still water down the ownership of the farm and you’d need a buyer, or to IPO.
Another option would be to have a whole life insurance policy setup to cover the IHT fees which is most likely an effective solution but not super cheap, although my quote was better than any savings or stock market could expect to return.
AccomplishedDinner55@reddit (OP)
Thank you! Understood!
FelisCantabrigiensis@reddit
Because a CEO is not the same as an owner.
The CEO might also be the owner, but they are different things.
ledow@reddit
If an individual owns it, they have to pay inheritance tax.
If a company owns it, then you could do that.
But to put the farm into the company has lots of other knock-on effects and shares in / ownership of that company would still factor into your estate as assets upon your death, so you'd still be taxed (somehow) if your share went to your child.
If the guy who owns half of Microsoft dies... that half of Microsoft doesn't just disappear - it's is still an asset worth a fortune and still gets taxed, especially if it's passed on to someone else. Whether that's capital gains tax because someone tries to buy that share from you (and you have to declare the gain from selling the shares), or inheritance tax because you pass it down to your children, etc.
But even in a company without "shares" (only a single director who has 100% ownership), the same applies to the whole company still.
IxionS3@reddit
Trusts aren't a magic "get out of IHT" card.
Depending on type there may be an IHT charge when putting assets into a trust and further periodic IHT charges whilst the trust is in existence.
See e.g. https://www.which.co.uk/money/tax/inheritance-tax/inheritance-tax-and-trusts-anGsd8w5JmUq
RaymondBumcheese@reddit
You’d have to pay capital gains tax to transfer the farm to a ‘company’.
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