Protesters and high-profile individuals like James Dyson argued that ending the inheritance tax exemption for farmers will spell the end of the family farmer. Paul Cheshire argues that’s not the case, and that the introduction of the tax exemption in the first place has made farm-land unavoidably expensive for farmers, and a refuge for those seeking tax avoidance. 

Ordinary family farmers have suffered real distress since the budget fearing for their children’s livelihoods. That distress and only that distress is what real farmers who produce food from the land should be upset about. Because the ordinary family farmers, living on the land they work, need not suffer any financial hardship from the changes to Inheritance Tax (IHT) proposed. Indeed, there is a good argument ordinary farmer who earn their livings from the land will benefit. Here is why.

When complaints are launched against the closing of a tax loophole, always follow the money: who benefits, who suffers from the change? The first to let rip was Tom Bradshaw, president of the National Farmers’ Union (NFU) in the Financial Times claiming that “farmers had nothing left to give with…skyrocketing production costs for fuel, feed and fertiliser”. The next warning voice was Sir James Dyson’s –halving the exemption for IHT on farmland would rip apart the very fabric of our economy and be the death of entrepreneurship… “no business can survive Reeves’s 20 per cent tax grab”. That was just five days after the budget. In a carefully documented piece  a week later the Financial Times pointed out that Dyson has bought up some 50 farms and now owns about £500 million of land, making him potentially liable for £120 million IHT come April 2026.

Many farmers – even family farmers – own multiple farms. But IHT is paid on the value of the whole holding not on each farm separately.

How many farmers will be affected?

When Rachel Reeves introduced the change, she claimed that about 500 farmers a year could be affected by this loss of half their IHT exemption. The NFU’s claim was that the figure should be the Country Land and Business Association (CLA)’s  70,000. These estimates of impact are many miles apart. The first and most obvious reason for this discrepancy is that the CLA’s figure came from counting all farms (rather than just those of farmers likely to die in any given year) so, as an estimate of the total figure, could not be comparable to the Treasury’s estimate of the annual impact. The Dyson example, however, illustrates another reason for rejecting the NFU estimate as even a remote approximation: Dyson may be an outlier owning 50 farms but many farmers – even family farmers – own multiple farms. But IHT is paid on the value of the whole holding not on each farm separately.

The authoritative and more objective observers – think tanks like the Institute of Fiscal Studies – think the “number of farming estates actually paying more tax due to the Budget policies could be much lower than 500 per year”. They reach this conclusion largely on the basis of the more appropriate tax data- based method of estimating the numbers who could be liable used by the Treasury but also because of the obvious fact that the IHT change will itself change behaviour. All family farmers need to do to avoid IHT is live for 7 years after gifting their farm to their heirs: obviously a few will tragically not live the 7 years, but  the great majority will. And after the change has come in, many farmers will no doubt choose to gift their farms when they are younger, so a new generation get a chance earlier. In addition, the price of land will come down, dropping some existing farms below the threshold.

Far from “protecting the family farm”, the inheritance tax loophole on farmland, introduced in 1984, simply pushed up the price of land without improving returns to active farmers. 

Nevertheless, if you want to get media coverage and farmers protesting in Whitehall,  panic inducing headlines are very helpful indeed. And there are two groups who will loose. The first and most obvious is the tax avoiders who have bought land. Not only will they lose their loophole but their assets are likely to fall in value (as is explained below). The second group is those industrial farm contractors who have moved in to work the land on behalf of those who bought it up as a tax avoidance asset. It is reported that the president of the NFU, while only a medium-sized farmer, has a 950-ha contracting business.

The origins and effect of the farmers’ tax-break

Far from “protecting the family farm”, the inheritance tax loophole on farmland, introduced in 1984, simply pushed up the price of land without improving returns to active farmers. This is because, like most agricultural subsidies, the value of the relief was capitalised into land values. As tax planners cottoned on to its role as a licence to avoid IHT, they advised their super-rich clients to buy land and take advantage of it. In the20 years to 2012, the price of farmland increased fourfold.

This turned landowning farmers (not of course tenants) into millionaires. Fewer hectares of land than ever before in modern history – just 44 – make a landowner a millionaire. Even in real prices, the area of land worth 1  million £ is smaller than ever recorded since 1781.

Taking at least some of this tax loophole away will do no harm to family farmers, it will help young aspirant food producers acquire the land they need  and at the same time help both public revenues and the environment.

Since land represents a cost of production — a cost not included in Tom Bradshaw’s list – land price increases do not help the incomes of food producers. With higher land prices and falling food prices in real terms, food-producing farmers’ rate of return and net incomes fall. IHT relief left them impoverished millionaires who then  claimed a need for more support. At the same time, because more expensive land has to be squeezed even harder for the last drop of revenue, the environmental damage caused by intensive agriculture was made worse. This is likely amplified by moving the management of land away from people who live on it – perhaps for generations – to faceless contractors.

The effects of the farmers’ inheritance tax will be positive

Taking at least some of this tax loophole away will do no harm to family farmers, it will help young aspirant food producers acquire the land they need – now priced on the basis of the value of food it can produce not as a licence to avoid taxes –  and at the same time help both public revenues and the environment.

Just a shame that the media storm fanned to defend the interests of the tax avoiders has caused real, but wholly unnecessary distress ,to real farmers. Also, that the relief was not wholly abolished. You can still avoid half your IHT by buying farmland.

All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.

Image credit: John Gomez in Shutterstock

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