A Personal View on the Agricultural Inheritance Tax Relief Changes.

What are the alternatives? 

With the dust starting to settle following the Chancellors November budget here are my personal thoughts on the situation. 

Before I go into the inheritance tax changes, there are a number of other announcements that have caused great concern within farming which are not getting as much attention. This includes an increase in Carbon Border Adjustment Mechanism (Cbam) from 1 January 2027 which is due to significantly force up fertiliser prices. As well as, the reclassification of double cab pickups as passenger cars and not commercial vehicles as they had been previously and a vastly inferior subsidy agreement that was promised to farmers. However, these are all for a separate blog post! 

A lot of the anger around the changes in the agricultural tax relief are, from what I can see, two-fold. 

Firstly, the figures used by the government don’t make any sense. I remember when I was watching the budget being announced and Rachael Reeves stated that 70% of farmers won’t be affected by the tax relief being reduced to £1mn; I initially thought she had misspoken, as it was clear to me immediately that the majority of ‘actual farmers’ would most likely be impacted. It has since come out that this includes all land transactions going through HMRC. This can extend to people who have a couple of fields attached to their house in which they have a handful of livestock, or contract a few fields to another farmer, or a hay field they cut once a year etc. Speaking to many of the farmers that we work with I struggled to find one that wouldn’t be affected. Even those farming on smaller acreage have glass houses or other infrastructure, equipment and stock that would take them significantly over the thresholds. Very few farms that are providing a viable, full time living to the farmer and producing significant amounts of food would be unaffected by these changes. 

Secondly, the people that the government were trying to reach with this policy are not the individuals that will be affected. I, and I imagine everyone else, completely agree that the previous policy has been extensively abused by wealthy individuals. You could also rightly argue that it enabled already wealthy land owners to continue to increase their wealth unconcerned by the inheritance tax issues of other individuals. However, if individuals are engaged in estate planning to the level where they have bought farmland to avoid inheritance tax, then they have the means, access to professional tax advice and the motivation to manage to circumnavigate these new rules anyway. The use of trusts, gifting, offshore company vehicles etc. will still be available to them. Even if they don’t, it is still a significant 50% reduction in the inheritance tax that they would have paid and therefore still an attractive proposition. This also applies to a number of larger farming businesses, who had also put in place plans to protect them from any changes such as those introduced last month. Institutional investors, who have for years been buying up swathes of the farmland in the UK for many decades as an investment are also unaffected. 

The people that in general haven’t planned for these changes are the small and medium sized farms. Many of these are family owned and run and have been for many generations. On the whole these are not hugely profitable operations and the majority of the family’s wealth is tied up in the land due to the huge increase in agricultural land values in the UK through recent history. 

There have been many proposals discussed to better target these measures so that family farms can be excluded and those individuals that are using farmland as a tax loop hole are taxed accordingly. This could include the ability to prove that the majority of their income is generated from farming and a history of owning and farming the land over a period of time and in many cases generations.  

I do realise that there are significant pressures being placed upon the public finances and government, either through financial necessity or political pressure need to raise funds. Farmland might seem like an easy target, but in my opinion, there are better ways to generate taxation out of agricultural land other than the inheritance route. 

The time to claw back some money from the treasury should be when agricultural land is sold for residential or commercial uses. At the stroke of a planner’s pen, agricultural land can increase in value by 50-100 times! Yes, land values can go from £5,000-12,000 when being used for agriculture to up to £500,000 - £1,000,000 in affluent areas near to existing towns and cities when planning permission is granted. This is the time to take an increased amount to fund the public finances, when the asset is liquid and the land owner has come about as close to a lottery win as there is, without actually winning the lottery. 

This situation is further enhanced by rollover tax relief which enables any recipients of this ‘lottery win’ to avoid any capital gains on the sale of the land if the proceeds are reinvested in agricultural land within 3 years of the initial sale. This means you have individuals, with now very deep pockets running around the country trying to buy up as much farmland as they can within the time limit. This is one of the main reasons that the price of agricultural land has increased at the rate that it has. The reasons that the government chose to go after inheritance tax rather than rollover relief baffles me. 

There does seem to be other options available, especially appealing would be something that incentivises the local authority to grant planning in the first place. Along with a shortage of money, the government also has made big promises around the number of homes they are going to build. A financial incentive such as a windfall of increased profits directly benefiting the local authority when planning is granted and land sold would incentivise more successful planning applications to be granted. Thus enabling more houses to be built and potentially land owners getting planning permission on land that they would otherwise have not. 

This budget was for many a final straw for a community that have felt increasingly targeted by politicians of all parties. I am sure there are many discussions going on in the hallways of power due to the widespread unpopularity of these decisions and I hold out hope that a more sensible approach will win out in the end. If it doesn’t the rapid decline in small farms across the UK may be inevitable.