Farm inheritance tax: farmers cannot go green if they are in the red

In villages across the country, irate farmers have accused the government of trying to end the tradition of the family farm by scrapping agricultural property relief, a measure which previously sheltered farms from having to pay inheritance tax on farmland.

Since Brexit a consensus has emerged that farmers should have to produce public goods in order to receive public payments. These “goods” include enhanced biodiversity, which could oblige farmers to plant trees or wildflower meadows.

How will scrapping agricultural property relief affect these plans for a green transformation of farming? First, let’s consider the changes.

The government has introduced a new minimum threshold for inheritance tax which means that farm assets worth over £1 million (US$1.3 million) will be charged, albeit at the discounted rate of 20% (instead of the standard 40%). Some farms may be able to claim a threshold of £2 million or even £3 million.

Labour claims this tax will only target rich landowners by asking them to pay a fair share of tax. One argument in favour of the tax is that it might deflate land prices and make it easier for new people to enter farming. The outcome is hard to predict, but this seems unlikely.

Despite the tax there will still be increasing demand for land to accommodate bigger farms, conservation areas, timber plantations, solar panels, wind farms, housing developments, and the like. This is, after all, an explicit aim of this Labour government: to stimulate investment in new green infrastructure.

In interviews, the chancellor of the exchequer, Rachel Reeves, has repeated the line that 73% of UK farms are not liable for the tax. But the National Farmers’ Union (NFU) has challenged this, claiming that around half of all working farms will be hit. These are farms that produce a lot of food, with high turnover and a lot of capital tied up in land, but low profit margins. Which farms get taxed and which dodge it will depend on who has the best plan put in place by their accountant.

The NFU’s figures illustrate the possibility that, even spread over ten years, the inheritance tax bill alone could erase all of a farm’s would-be profits.

Meanwhile, it’s hard to know how much money the new inheritance tax arrangement will raise for the treasury as there are many ways to dodge it, such as gifting the farm to children seven years before the death of the landowner or putting the farm in a trust. The sudden death of the legal landowner before an effective plan is put in place could see a hefty tax bill fall upon the next generation.

How it will affect tenant farmers, those who rent from a landowner, is harder to predict. Landlords might seek to evict tenants in order to sell the land and pay the tax bill. Or it might mean more land is available for tenants to buy themselves.

Eating away at farm profits

What has received less attention, despite also costing farmers, is a new carbon tax called the carbon border adjustment mechanism. This will be applied to imported fertiliser, as well as steel, cement and hydrogen. The EU is bringing in the same taxation policy but at a slower pace, giving European farmers a competitive advantage in the meantime and a chance to adapt.

Labour plans to accelerate the transition from the previous subsidy scheme, which paid farmers for the amount of land they managed, to the new one, which aims to pay farmers for public goods. Add in a tax rise on double-cab pickup trucks and a rise in national insurance contributions for employers and it will be businesses already struggling that will feel the biggest pinch.

In a global economic system characterised by competition and uneven regulation and taxation, if British farms cannot afford to produce food then production will shift to where it is cheaper (and probably more environmentally destructive) to do so, blunting any attempt to curtail carbon emissions. It would also see British food production decline.

It doesn’t help its case that the Department for Environment Food and Rural Affairs (Defra) has been underspending its budget for the environmental land management schemes, the replacement subsidies for farmers aimed at paying for actions such as improved soil management. Frustratingly, Defra is going to return that money (£100 million) to the treasury rather than commit to spending it next year. Defra has also said the department was not properly consulted on the inheritance tax change.

The overall result is that farmers feel neglected during what is an increasingly difficult time. One researcher has documented a mental health crisis among farmers who are struggling to grow food in increasingly volatile weather, with little to no external support.

A genuinely green transition of agriculture will require both investment and radical reform of the entire food and farming system. Labour is showing no appetite for this.

The contradictions of the market

Farm businesses were already feeling the squeeze. The budget will tighten their economic constraints.

It might’ve helped Labour to sugarcoat its bitter changes by committing to other incentives or reforms. After all, it’s hard for farmers to repair ecosystems and reduce carbon emissions when invoices are coming thick and fast. There have to be carrots along with the stick.

Some notable farming figures have celebrated the rich paying a fairer share of tax. In reality, it is likely that it will only generate what the treasury calls a “rounding error” – in other words, relatively little. It may backfire and harm working farms and, in turn, the environment, if farms choose to intensify their operations by demanding more produce from the same land in order to remain profitable.

As author and shepherd James Rebanks has pointed out, repairing ecosystems requires a profitable business in order to fund the work required. Farmers have to shell out first and claim back later. Where a farm can’t afford work, like creating new wildlife ponds, the work simply won’t be done.

Whatever Labour’s long-term plans, stoking resentment among farmers in order to raise a relatively small amount of money will surely prove counterproductive for a green transition.

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Alex Heffron helps to run a small, mixed farm in the south-west of Wales.