Since the government announced its new inheritance tax rules for farm owners and family businesses in last month’s Budget, there's been intense debate about how many people and how many farm businesses will be affected, and to what degree.
Rachel Reeves’ so-called “tractor tax," is a 20 percent inheritance tax (IHT) “hit” on UK farms that will apply after some basic allowances. It will affect farming families as well as many farm tenants.
A big argument is raging over numbers. Whereas the Treasury, using HMRC data, claims that only around 25 percent of farms will be affected, The National Farmers’ Union (NFU), backed by its own detailed “impact assessment", claims that as many as 75 percent of farmers will be affected.
What is APR?
Agricultural Property Relief (APR) on land and farm buildings and Business Property Relief (BPR) on livestock and machinery, both apply to farm businesses in combination and BPR applies to all other family businesses. These concessions are there to protect businesses when their owners die. This idea is they allow them to be passed down to family and carry on trading uninterrupted.
In many cases, these farm businesses have been built over several generations and have been traditionally exempt from inheritance tax (IHT). This incentivises the owners to invest in them, to grow them and to them pass on to next generation. With a 20 percent tax amount to pay over a £1 million basic relief, many farms and also some small family businesses simply will not afford the tax, it is claimed. They have a stark choice, some say: either they must sell up entirely or they sell off assets to pay these death duties, as they were traditionally called.
If you’re a butcher, baker or candlestick maker, with healthy profits out of which the tax can be paid, and it can be paid over ten years, then maybe you can easily afford it, but it's still a disincentive to invest in the business and grow it. However, for farms, sadly, argues the NFU, that’s simply not the case. Most farms are operating on extremely tight profit margins so they are simply unable to pay the tax out of profits.
Farms a special case?
Farmers on genuine working farms, as opposed to hobby farms and small holdings, or large corporate farm enterprises, claim to be a special case. Their margins are so slim (around 1 percent in most cases) that a poor harvest or simply bad weather can so easily result in losses.
It means that many of these businesses haven’t built up cash reserves. In fact, many farms are up to their necks in debt, in hock to their banks. So, they don’t have a hope of raising Rachel Reeve’s tax out of their profits, even with an extended payback over 10 years.
The government’s claim is that the tax is aimed at those speculators who have been investing in farmland, not farming productively but purely taking advantage of APR. But the way the tax is to be applied, argue farming bodies, it will fall on far too many small farm businesses.
Generous allowances
Rachel Reeves argues that generous allowances will exempt most farm businesses from paying the tax. The NFU claim this is simply not true—see their impact assessment.
APR and BPR are to be charged above a £1m relief per owner. So, claims Ms. Reeves, a typical farm business with the husband and wife’s allowances together, plus the nil rate band (NRB) and the residential nil rate band (RNRB) allowed on their farmhouse, will give another £1m, amounting to £3m tax relief in total before any IHT is payable.
That, to most people, sounds very generous, especially when set against IHT at 40 percent payable by most private individuals. Those with a sizable family home, savings and perhaps a private pension. That’s a charge for anything above their basic NRB, and the full RNRB (£1m) if the estate is less than £2m.
Motoring writer Harry Metcalfe farms in West Oxfordshire and is known for his brilliant YouTube series Harry's Farm and Harry’s Garage. Harry says the minimum size for a viable farm unit is 500 acres. Many small farms are below this size and only marginally profitable, yet their owners still toil 7 days a week to keep their lifestyle going; they simply see themselves as custodians of the land, assets to be passed down to the next generation, says Harry.
Minimal profits
One example Harry gives is a family farmer in his acquaintance, a 500-acre farm making a typical circa £60,000 per year profit, if the weather is kind to him. The tax bill could reach £1.2m when he dies.
A more typical farm (land, buildings and equipment) of less than 500 acres, making perhaps £30,000 in profits, could be worth £5 million total. With the full £3m exemption claimed, there would be 20 percent of £2m to pay. That's a £400,000 tax bill. Even if payments are spread over 10 years, it would be impossible to pay this out of £30,000 p.a. profits. What’s more, there would be no money left for Capex; no investment necessary grow and replace worn-out machinery. Land would have to be sold, making the farm even less viable, or the business closed and sold off entirely.
Do some tax planning
Ms. Reeves advises farmers to do more tax planning, which is rather ironic when HMRC frowns on any sort of tax avoidance. She says that farms can take advantage of the 7-year rule, passing on their assets to the next generation before they die, tax-free if they live a further 7 years. Others advise taking out life insurance, but that becomes very expensive as people get older.
The 7-year loophole, though, is fraught with difficulty for most working farming families. In most cases, the loophole is simply not an option. Many farms’ assets have been left in grandparent’s hands, given the best tax planning advice prior to this change. If one spouse has died and the other is over 80, there is little chance that the 7-year rule will work, and if the farm assets are worth more than £2.7m, very likely for most viable farms, there is no RNRB.
It means that in the above example, with one spouse remaining, a farm with assets of £5m, the relief of only £1.65m gives taxable assets of £3.35m and a tax bill of £670,000. That’s likely impossible to pay out of the meagre profits a farm of this size typically makes.
Farm tenants at risk
Where farmers have stopped working and let-off their farm assets to working farm tenants, these tenants are now seriously at risk of losing their livings when tax bills of this magnitude become payable. Many will be forced to leave when farmland is sold off.
Commenting about the possible effects of a change to APR at the Labour Party conference in Liverpool earlier this year, NFU president Tom Bradshaw said: “I’m… very concerned that the changes would damage the tenanted sector, as landowners will have much less incentive to let land to agricultural tenants. In short, this ‘family farm tax’, which is what removing APR amounts to, could be too much for some farming businesses, which are already struggling with numerous challenges.”
Designed to hit the ultra-rich
The tax is ostensibly designed to hit those ultra-rich landlords, many of whom are landowners and speculators not involved in agriculture. They simply invest in farmland to take advantage of APR. However, most people in this position have already taken tax planning measures, such as the 7-year rule, trusts and offshoring to insulate themselves from any tax hike.
The tax will fall on those hard-working, smaller farming families, small-scale farmers who help maintain the countryside and work tirelessly to make meagre profits. They may be “land asset rich,” but most are “cash poor." Their sons and daughters face a huge tax bill because land prices are rising. If they are forced to sell up, it is argued it will lead to more large-scale corporate farming, it will damage the rural economy, and it will destroy a way of life and tradition at the heart of the English countryside, experts say.
A national debate
The move by Rachel Reeves and Keir Starmer, having promised farmers before their election there would be no change, has caused a furore and a national debate, with much public support for the farmers, while others are behind the government’s stance. But farmers have threatened they will not take this lying down.
Some people have expressed cautious support for the measure, highlighting the need for “fairness in the tax system." They argue that too many large estates have historically benefitted from excessive reliefs. One recent comment described the proposal as “a long-overdue change” to curb speculative land buying and ensure the wealthiest pay their fair share.
Some people think the government has balanced the protections given for smaller farmers while targeting the abuses by investors and aristocratic estates. But the argument over the numbers affected and the impact on individual farms and other businesses raise serious concerns over the potential for miscalculation; the potential to unfairly burden struggling farms and small businesses is high, argues the NFU.
Little experience of country life
It is perhaps understandable that those with little or no experience of farming or country life will have little sympathy for “rich” farmers who own large tracts of land when they find themselves suffering from a cost-of-living crisis, farmers say.
The government says it must repair the economy and give more support to public services and the NHS, which it argues, farmers themselves benefit from. But farmers say this argument doesn’t pass muster when food production falls and food prices rise in the supermarkets.
The fight is yet to come
British farmers last week descended on London to call on the government to scrap the new inheritance tax rules on land ownership.
Farmers said they may reluctantly need to raise the stakes to make the government sit up and take notice. They will be prepared to intensify the dispute in ways farmers are known to do. Meanwhile ex-advisor to Tony Blair, John McTernan, a still influential figure in Labour, made a highly controversial remark this week. He told GB News: “If the farmers want to go on the streets, we can do to them what Margaret Thatcher did to the miners… we don’t need small farmers.”
This dispute is likely to be interesting if nothing else.
Secretary of State Steve Reed has said that they (the government) intend to develop a "25-year farming roadmap" to "transition farming' to new models" that are "more environmentally and more financially sustainable for the long term."
This DEFRA roadmap would be focused on making farming and food production "more profitable in the decades to come". In a recent speech at the Country Landowners’ Association conference, Mr. Reed said to delegates, "I am not prepared to let so many farmers keep working so hard for so little. We need to work together to agree what we want British farming to look like in 25 years' time."
Meanwhile, the dispute goes on, with even Defra and the Treasury unable to agree among themselves as to how many farm businesses will be affected by the new tax regime.
The Department for the Environment, Farming and Rural Affairs (DEFRA) and the Treasury disagree on how many farms will be impacted "by as much as 40 percent” , says the NFU.
Lib Dem MP Tim Farron said last week 1,400 farmers in Cumbria, where he is an MP, will be affected and will not be able to afford to pay the tax as many are earning less than the minimum wage, despite being asset rich.
A bid by DEFRA to soften changes to inheritance tax for farms—possibly by exempting some older farmers—was rejected out of hand by Rachel Reeves and the Treasury.
There’s just a chink or light for farmers, as the Treasury has announced it is to carry out a detailed impact assessment next year.
Tags:
Comments