Ministers appear to have got their understanding of farming from Ladybird books filled with smiling yokels on little red tractors, says Tim Bonner
The starting point for trying to understand the current row over inheritance tax and agricultural land is that farming is an essentially illogical activity. The return on assets in farming businesses is consistently below one per cent and that is with a healthy dose of physical labour thrown in. The asset value of most family farms is, however, largely irrelevant except perhaps to leverage borrowing. That is because the primary aim of the business is to pass that asset on in the same or better condition than it was inherited by the previous generation.
Farm sizes have grown over recent decades as more land is required to support a family (which often means at least two generations taking a living off the farm) and that means that the asset value of an average family farm is considerable. Land prices vary depending on a range of factors, not all of which relate to productivity, but £10,000 an acre is a rough average so that a 400 acre farm could be valued at around £4m, plus housing often for two generations, stock, and machinery. The return on that asset might not be huge, but until recently there has been an implicit deal between the state and the farming industry that farmers will provide cheap food and that they will be looked after for so doing.
Brexit was always going to be a challenge for farmers
For decades the main delivery route for that has been the EU’s Common Agricultural Policy (CAP) which supported farm incomes and kept down the price of food on the supermarket shelves. A win for politicians and for farmers, but a settlement that was always going to be challenged by Brexit. For generations the political debate over farm support was outsourced to Brussels where the power of the German and French farming lobbies protected the CAP budget. Now, however, support for British farming is coming into direct competition with spending on health, education and a hundred other government priorities. This was never going to go well for farmers.
The other part of the deal related to inheritance tax and the understanding that farming is, at least in part, a different sort of business. Of course there is profit, loss and cheap food, but there are also a much wider set of public goods around the countryside, nature recovery and tackling climate change which justify both government support and a differential tax regime. If family farms are particularly valuable to the country as a whole, the argument goes, then they should be handed through the generations without being taxed out of existence. That is why Agricultural Property Relief (APR) exempted farmland from inheritance tax.
On one hand the Chancellor’s decision to amend APR was not wholly surprising because it is becoming increasingly common for the purchase of agricultural land to be part of tax planning by non-farmers. Agricultural land holds its value (as farmers note ‘they aren’t making any more of it’) and with demand for non-agricultural land use such as renewable energy and carbon sequestration increasing as well it looks a sensible investment for someone looking to minimise their inheritance tax liabilities.
What was surprising, however, was that the government approached the policy with all the subtlety of a steamroller, especially as it had made specific promises to the farming sector that it would not be changing the inheritance tax regime. Its claim that the policy would protect family farms by providing a £1m threshold was instantly identified as ludicrous by anyone who understood farming and created the unfortunate impression that ministers sourced their understanding of farming from Ladybird books where smiling yokels on little red tractors eek a living off 50 acres. Worse the current policy creates a ‘death trap’ where a farmer can pass on his farm if he or she dies before 1 April 2026, or it they gift the farm to the next generation and survive seven years, but if they die between those dates their heirs will be met with an unavoidable tax bill which may render the farm unviable.
The current policy creates a ‘death trap’ where a farmer can pass on his farm if he or she dies before 1 April 2026, or it they gift the farm to the next generation and survive seven years, but if they die between those dates their heirs will be met with an unavoidable tax bill which may render the farm unviable.
Tom Bradshaw, the impressive President of the National Farmers Union, met the Prime Minister last week for what was subsequently described as a “grown up” discussion about the inheritance tax situation. The public are currently with the farmers in this argument and Labour’s current approach risks wasting a lot of goodwill it has developed in the countryside over recent years. It does not have to back down – there is a valid issue to address – but it can tackle tax avoidance without throwing family farms under the bus.
Tim Bonner is chief executive of the countryside alliance