Ben Lowry: Now only a small fraction of Northern Ireland farmers will pay inheritance tax

Farmers will get a £2.5 million allowance tax free before they are eligible for the so-called Farm Tax (which in effect means inheritance tax)​. But in fact for most farmers, if they are married or in a civil partnership, the tax free amount will be £5 million.

In fact, as I will explain below, the tax free amount will in many cases be £6 million. This will pull all but the very biggest farms in Northern Ireland out of the tax net.

The whole Farm Tax has been handled badly by the Labour government. The u-turn is welcome. Even so, aspects of the original proposal and indeed the generous treatment of farms for tax purposes were never widely understood.

I wrote about the original plans a year ago, and surprised some readers when I explained that farmers would under the original plan still be able to pass on potentially £3 million free of inheritance tax. Even at that point – after the £3 million – the tax would be levelled at 20% rather than the normal inheritance tax rate of 40%.

There were a number of problems with the original plan, including the fact that the threshold at which you pay tax was set too low, and also the fact that farmers who planned carefully would be in a much better situation than those who did not, perhaps because they were now too old to understand financial details, or too weary to change their wills and their ownership arrangements.

Many of these criticisms apply to the wider way in which we tax inheritance, which can be avoided by some of the wealthiest people in the land entirely – yes entirely – by handing down their assets to offspring, so long as they continue to live for seven years after doing so (which, given that none of us can be sure how long we will live, introduces a big element of luck to whether anyone handing down assets lives long enough to exempt their heirs from tax).

The key thing to understand about inheritance tax is that the vast bulk of people in the UK – around 95% of people who die – do not have enough in their estate to be liable for death duties. This is because everyone can pass on £325,000 to their beneficiaries without their estate being liable for tax. This means that a couple can pass on £650,000 jointly. And even a prosperous couple who have, say, a £500,000 house and £200,000 in savings – total estate of £700,000 – might avoid being liable for tax if their funeral costs, their lawyers’ fees and any charitable bequests, none of which are liable to tax, bring that total down to £650,000.

But if the couple is leaving their home to direct descendants – children or grandchildren – then there is an additional £175,000 tax free allowance (a so-called nil rate residence band) each, or £350,000 if shared between a couple. This is then added to the £325,000 inheritance tax free allowance (£650,000). It means that the total amount that can be bequeathed tax free in such circumstances is now £1 million. Remember, I am talking above about the general population – I am not talking about farmers.

Now as it happens I think that system above is unfair because there are other people – for example a spinster who ends up with a valuable home that she wants to leave to her nephews and nieces – who do not benefit from either the home exemption allowance (a nephew is not a direct descendant). But there is not room to explain all that here.

The original Labour proposal was to add another £1 million tax-free allowance to farmers, and this would also be per person. A married farming couple would get a £2 million combined tax-free threshold on top of their existing potential £1 million tax free exemption that is available to every couple that is married or in a civil partnership. Thus £3 million total exempt. The problem was that a married couple in which one spouse died decades ago would not benefit from the combined exemptions, nor a couple if their farm was not jointly owned.

By making the farm tax-free amount £2.5 million, combined as £5m for a couple, and added to the existing potential £1m combined couple inheritance exemptions, a theoretical £6m is exempt. Only a tiny fraction of farms in NI are worth that. And even if a single or widowed farmer only has one set of tax allowances, he can leave on his or her own a combined £3 million tax exempt, so long as the farmhouse is being left to a direct ​​​​descendant.

A 120 acre farm of prime Ulster agricultural land will probably be worth £2.4m and even if the house and buildings are worth £600k that will all be exempt, even if the farm is not handed down by a couple. This new plan will remove almost all farmers from the tax net.

• Ben Lowry {@BenLowry2) is News Letter editor