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Debate Over Inheritance Tax Changes for Farmers

Should affluent landowners benefit from a tax break intended to assist small family farms in transferring their land to the next generation? This question has gained traction following the recent budget statement, which has introduced a 20% inheritance tax on farms valued at over £1 million. As a result, children of farmers will now face taxes on inherited land. While a 20% tax rate is lower than the standard inheritance tax, it can seem generous compared to the earnings of other working-class professions. However, currently, £1 million merely affords around 40 hectares (100 acres) of farmland, insufficient for a functional farm operation.

The agricultural sector is characterized by long-term investment requirements and typically modest financial returns. The landscape has changed since 1992, when farming families last needed to engage in tax planning for succession. As someone who comes from a farming background, I support many aspects of the current budget. However, I contend that the chancellor, Rachel Reeves, has miscalculated the inheritance tax threshold. Although one interpretation of her decision is an attempt to close a loophole that allows wealthy individuals to acquire farmland and pass it on tax-free to heirs, it seems the threshold should be significantly higher than £1 million to effectively address this issue.

To put things into perspective, the minimum commercially viable farm generally exceeds 120 hectares (300 acres). At an average land price of £10,000 per acre, a threshold closer to £3 million would be more relevant. Upon further evaluation, it becomes evident that most farming couples passing down their land along with their primary residence would benefit from allowances that effectively double the limit. According to Andy Summers from the Centre for the Analysis of Taxation, inheritance tax generally applies only beyond the £2 million to £3 million mark for the majority of agricultural estates. Therefore, I propose a tiered tax structure where farms exceeding £3 million incur a 20% tax, those above £5 million face a 30% rate, and farms over £7 million are subject to the full 40% tax rate.

In the quest to generate some of the required £40 billion in tax revenue, Reeves could have also targeted the substantial increases in land values associated with granting planning permissions. Farmers who see land value appreciation can entirely bypass taxes by reinvesting in more land. Implementing a tax on these capital gains could potentially yield more revenue and promote a less divisive conversation around taxation reforms.

It’s crucial, however, to acknowledge the primary source of dissent against these proposed tax changes. The unintended consequences of existing tax breaks for landowners have led to soaring land prices that effectively shut out new agricultural entrants. The situation contrasts starkly between regions, as evidenced by my own experiences owning land in both Devon and the Vendée in France—where prices are drastically different. In France, to farm, one must meet local suitability standards, which many property investors may not pass.

Recent research utilizing HMRC data reveals that about £900 million in inheritance tax relief was claimed by an average of 1,300 estates annually between 2018 and 2020. Notably, two-thirds of that relief was absorbed by roughly 200 estates, each averaging £6 million in value. Furthermore, a government analysis indicates 73% of estates with agricultural property will remain unaffected by these new inheritance tax adjustments. Although no one relishes paying taxes—especially those accustomed to exemptions—closing a tax loophole that primarily benefits the wealthiest landowners seems a reasonable proposition, albeit perhaps needing better implementation.

As our nation grapples with failing infrastructure and sluggish productivity, a degree of tax contribution from those with the most wealth is essential. The prevailing economic disparities and a shrinking workforce further highlight the necessity for equitable taxation. I feel Reeves could have taken a more assertive approach in redistributing the tax burden, favoring labor over capital. Enhancing capital gains tax to align with income tax and contemplating a wealth tax on assets exceeding £10 million would have been commendable steps.

In conclusion, the loudest voices opposing changes to the inheritance tax should not be mistaken for representations of the farming community. Instead, they often champion the interests of the wealthiest individuals resistant to equitable taxation, seeking to amass more money and property.

Guy Singh-Watson, founder of the organic vegetable box enterprise Riverford, operates organic farms across 60 hectares (150 acres) in Devon and 120 hectares (300 acres) in Vendée, France. After selling Riverford in 2018 to its 1,000 employees, the company is now entirely employee-owned.

Source
www.theguardian.com