The Environmental and Rural Affairs select committee is surely right that the government imposed the inheritance tax changes on farmland without proper consultation – and ignored the likelihood that they will cause serious hardship for family farms.
Never mind the threshold which Rachel Reeves claims will mean most farms can still be passed on IHT-free – something questioned by the NFU and other critics – the new rules will inevitably drive many larger farms out of business when the current generation passes on.
But is there really any point in what the committee is proposing: that the changes are simply delayed for a year? Surely what we really need is some serious thought put into how government can close the loophole whereby wealthy individuals can avoid inheritance tax by putting their wealth into farmland – without impacting family farms.
It is not just farms that are affected by Reeves’s tax grab – it is family businesses of all kinds.
What we really need is a legal concept which I will call a Family Business Trust, allowing genuine family businesses to pass down the generations without being clobbered by inheritance tax. So long as the family remained engaged in the business, it could be inherited by the next generation with neither inheritance tax nor capital gains tax being payable.
To create the vehicle of a Family Business Trust would seem to me to be a fair compromise
There is a way, however, to prevent such a system being abused by wealthy tax-avoiders. Sell out of the business, and capital gains tax would become payable. The rules could go further and stipulate that whenever a business was passed on to a succeeding generation it would be deemed to have acquired all its assets at zero cost. Thereafter, if the company sold off any of its assets, capital gains tax would become payable on the full value of those assets – not just the uplift in their value since they were acquired by the business.
That would prevent wealthy families using a Family Business Trust for purposes of speculation – and ensure that they could only benefit from IHT if they were genuinely engaged in business.
I am sure there will be people who can poke holes in this proposal. Fair enough; I am proposing it as a means of opening debate on how we handle the issue of IHT and family businesses – while accepting that working out the details could be tricky.
As I have written here several times before, I am not in favour of simply abolishing IHT – which I know is a totemic policy for many conservatives. To do that would exacerbate the growing division in society between those who are fortunate enough to have wealthy parents and those who are not.
Nor do I believe in making IHT punitive or confiscatory – rather I believe that a penny should be taxed in the same way whether it has been earned, inherited or gained through investment.
To create the vehicle of a Family Business Trust would seem to me to be a fair compromise – one that retains IHT, yet ensures that entrepreneurs are allowed to build up successful businesses without seeing them dissolved, or sold to larger suitors, on their death.
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