How farm tax could be a political issue after Rachel Reeves’s Budget

Although farming only accounts for about 2 per cent of UK GDP, the role of farmers as custodians of the countryside and providers of food means agriculture assumes a disproportionate place in the national discourse. It is high profile and, since July’s general election, well represented in all three main political parties in the Commons. No surprise, then, that Rachel Reeves’s proposed expansion of inheritance tax to include farmland has sparked considerable controversy...

What is Reeves doing?

She’s hiking tax by reducing the previous 100 per cent uncapped exemption from inheritance tax under agricultural property relief (AGP) covering land, associated buildings and businesses, livestock and areas set aside for environmental purposes. The new rule will be an exemption for AGP to the value of £1m, and then the rest (ie only on the extra slice above £1m) being subject to a 50 per cent charge. This can be paid in 10 equal instalments over a period of 10 years. Thus, someone inheriting a farm worth say £2m will, from next April, be likely to be liable to a charge on the £1m over the £1m limit at a typical marginal rate of 40 per cent – so £200,000. This could be spread at a rate of £20,000 per annum for a decade.

What’s the problem?

Critics argue it will mean farms having to be split up to meet unaffordable inheritance tax bills, with catastrophic consequences for already beleaguered rural communities. Britain’s food security would also be jeopardised. They especially point to how many British farms are asset-rich but cash-poor, so that even what might be superficially “fair” liabilities for tax can’t be easily afforded, potentially leaving business units uneconomic. There is context too: farmers surviving on minimal profit margins thanks to international competition (increasing post-Brexit with the Australian and New Zealand trade deals), the buying power of the supermarkets, and likely declining income support from the taxpayer.

So what are the arguments in favour of the changes?

First, there is the matter of equity. Many will wonder why inheriting, say, a house worth £2m should be more heavily taxed than a farmhouse worth £2m. Or why a massive landed estate worth, say, £17m should have an effective rate of inheritance tax lower than a house in London. Second, AGP means that all interests in farms could be passed on with lower tax bills, which encourages people to hold wealth in farmland rather than other assets. It’s hard to justify this on purely economic grounds, and "fiscal neutrality" is a laudable policy objective.

In fact, the previous generous AGP exemption has encouraged some people to invest in land at least partly motivated by its tax efficiency: James Dyson, for example, is reputed to own 36,000 acres of British farmland; and Jeremy Clarkson is now a well-known recruit to husbandry. Critics argue that most recipients of APR are not small family farmers, but the very wealthiest of landowning families. Even under the new rules, there is no cap to the tax relief available, albeit at the new rates.

So who will lose out?

Larger estates, in both senses of that term; about 500 a year will be affected, according to the Treasury, but will still be more favourably treated than urbanites. Some three-quarters of estates claiming agricultural property relief are expected to be unaffected by these reforms. The typical farm subject to inheritance tax is worth about £1.4m.

But what about tenant farmers?

This is an especially fraught and complicated area, and subject to a consultation due to end next year.

What does the opposition say?

Conservative spokesperson Steve Barclay says Labour has broken another promise – because the now Defra secretary, Steve Reed, said last year that: “We have no intention of changing APR.” But there’s no guarantee yet that the Tories would reverse Labour’s changes.

For the Liberal Democrats, Tim Farron is determined to block the move: “The chancellor’s Budget is a disaster for tenant farmers. Small family-owned farms will be hit by the changes to inheritance tax and will be forced to sell up, with young people robbed of their opportunity to farm. We’ll be fighting tooth and nail to protect family farms.”

It is perfectly possible that noisy convoys of tractors will descend on Parliament Square and block motorways before too long...

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