Before I arrived in Portugal this winter, the UK press was filled with speculation about what direction the new Labour Chancellor might take. The recent Budget was quite a momentous occasion because, after 14 whole years in the political wilderness, a Labour government would finally deliver an actual Budget.

One of the biggest problems that many families face after losing a loved one is the specter of inheritance tax (IHT). There were so many stories being bandied about how the new socialist government was going to shut as many loopholes as they possibly could to stop estate planners from creating pathways for wealthy clients to avoid this often cruel levy.

IHT can be a tremendously complicated affair. But despite that, over the years, only a very small proportion of the population end up paying it. That's because there are so many different ways in which the dreaded death tax can be avoided and of course, a person’s net worth needs to exceed the £325,000 threshold before anything is payable.

Sadly, however, inflation has taken its toll. It has dragged more and more family estates into the inheritance tax net as property values surged whilst the threshold remained frozen at £325,000 (further frozen by Rachel Reeves until 2030).

As things stand, anything a person owns that's valued beyond the statutory £325,000 threshold is taxable at 40%. So, without mitigation and some degree of estate planning, that's going to affect people who own a fairly modest mortgage-free home. However, with the right plan in place, there’s currently no IHT payable when estates are transferred between spouses (spousal exemption). In such circumstances, IHT is only payable upon the second death, unless certain measures have been taken to ring-fence assets by placing them outside the surviving spouse’s estate.

I don't mind confessing that I've never been a socialist. I obviously want to see a fair and just society that provides a safety net for the most vulnerable. The problem is, I've never understood the machinations of the socialist mind and how they aim to achieve ‘social justice’. To me, there's nothing in their agenda that adds up to make any sort of economic sense. Everything in the red flag-waving mindset is largely based on ideology and it just totally confounds every economic norm that I've ever worked with. A healthy economy benefits all, so I don't see how levying punitive taxes on strivers and entrepreneurs makes things any better for anyone because it disincentivises investment.

It looks to me like socialists still fervently believe that everyone on earth should be born equal and that all should be bestowed with similar opportunities. Whilst this is doubtlessly an admirable outlook, we all know that the world doesn't quite work like that. Some folks have the ability to earn and save lots of money whilst others prefer to spend what they earn. Regardless of outlook, somehow we all bring something to the table and society kind of muddles through - albeit imperfectly.

Before the recent Labour Budget, well-heeled landowners didn't have to worry when the Grim Reaper paid their families a visit because their land, their buildings, their farming equipment and all their other farming chattels were exempted from IHT. This was thanks to something known as Agricultural Property Relief (APR). Farms seamlessly passed from generation to generation without the need to take evasive measures to protect valuable estates from being eroded by IHT. Not only did this help the landed gentry protect their estates from being fragmented over the years, it also protected ordinary farmers. This in turn helped guarantee the nation’s food security, especially nowadays, with population growth at a high. We all need affordable food to eat.

But soon, the APR exception will be limited to the first million pounds of any landowner’s estate. After April 2026, 20% IHT will be payable on anything and everything that's valued above the £1M threshold. This might sound like a generous waiver considering the rest of us have to pay 40% (after the first £325,000). However, most family farms are worth at least a million pounds (usually much more) especially when the district valuers will be taking into consideration all that the deceased person owned, including expensive equipment and general agricultural paraphernalia.

This whole sorry situation has been compounded over the last few years as farmland has become a desirable commodity amidst wealthy city folk. Investors and merchant bankers tend to be exceptionally wealthy people, so the value of anything they desire tends to go through the roof. Buying a farm and a few hundred acres of land became a fabulous way to shield capital from the marauding hands of the tax man - until now.

Before the Budget, UK farmland regularly changed hands for over £30,000 an acre (depending on the region). That means a 100-acre farm could potentially be worth some three million pounds. That sum doesn't even include a cosy farmhouse or any of the necessary outbuildings, such as cow sheds and barns. Three million doesn't actually get you any equipment or livestock either. Just the land.

Despite the headlines, there are caveats. The updated relief can turn out to be a lot more generous than it first appears. Modest family farms jointly owned by a couple can have the value split down the middle, meaning that the farm qualifies for £2m APR relief (a million each). There's another £500,000 relief available for each partner when there’s a residential property involved. This means a farm, which might be worth £3M, might not attract any IHT whatsoever provided all the paperwork such as deeds, wills and so forth tally up. Of course, the nil-rate seven-year rule still applies if assets are transferred as lifetime ‘gifts’ and the donor survives beyond seven years after making such a gift.

The way I see this is really quite easy to fathom. Whilst a bolshy left-wing Chancellor went gunning for Lords, Ladies, Dukes and hedge-fund managers; it will be the already beleaguered small British farmer who could actually bear the brunt of these latest measures.

So, I'm struggling to understand how any of this benefits the country in the longer term, any more than cutting winter fuel payments to hard-pressed pensioners brought in any significant quantity of bacon.

I’ve always been taught that good economic management isn't just about the here and now; the benefits come from a more holistic approach. It's about paving the way for a more prosperous future.

We’re asked to believe that the political classes are our best and brightest people. But surely an accountant who's actually any good will be off earning an absolute fortune in the private sector? Perhaps only rubbish accountants end up working for the Treasury which probably explains why public finances seldom seem to add up. Their plans seem to get snagged up by the laws of unintended consequences, otherwise known as poor foresight. In economics, good foresight is absolutely key.

Author

Douglas Hughes is a UK-based writer producing general interest articles ranging from travel pieces to classic motoring. 

Douglas Hughes