The Government argues that only a tiny number of farmers will be affected by the changes to Inheritance Tax, the National Farmers Union claim it will hit the majority of farmers. By instinct I am on the side of the Union.
But which is right?
For background until the last budget farm land could be inherited tax free. This has led to a small number of examples of very rich people buying up lots of farmland; James Dyson owns 36,000 acres of farmland, and Jeremy Clarkson was always open that he bought his farm for tax purposes.
The new rules are that only the first £1m is tax free, after that it is taxed at 20%, with the ability to pay over 10 years interest free. The Government’s argument is that these Inheritance Tax changes will only affect a minority of farmers – with appropriate tax planning up to £3m can be passed down tax free, which means that only a few hundred land owners like Dyson and Clarkson will be affected. Over £3m they still only pay reduced IHT and have years to pay interest free, unlike the rest of us. This will affect a very small number of estates:
Only 500 estates are affected if the cut off is £1m, less than 100 if the cut off is £3m.
But there is a lot more to it than that. The UK has incredibly expensive farm land; a farm in England is worth 3 times per acre than the same farm in mainland Spain, even though farmers there benefit from the single market and the customs union. There are parts of France where farm land is less than 20% of the cost in the UK. Both countries notably have rules which stop anyone from buying farmland unless they can prove they are a legitimate farmer.
This is the Knight Frank index of the value of agricultural land:
There has been a vast increase in the value of farm land over the last few decades, with the only fall coming about because of the Brexit vote. Prices have increased way of out proportion with demand for the products which farms produce. It is hard to see this as anything other than a massive asset bubble.
One of the reasons why farm land is so expensive in the UK is that a small number of very rich people own huge estates, often using them as a tax dodge, but it is also clear that as the land price bubble has grown it has been fuelled by speculation. Again, from Knight Frank, while average price per acre in the UK is nearly £10k if you or I wanted to buy enough farm land to make money we would need to cough up £20k per acre:
“There have been few large blocks
of bare land put up for sale and
those that have hit the market have
generally created competitive bidding
with prices reaching as high as
£20,000/acre. Buyers have often been
wealthy local landowners competing
with tax-motivated farmers”
When the IHT changes go through the price of farm land is likely to fall.
This isn’t all bad news. If land becomes cheaper food will become cheaper, and it will become much easier for people to become farmers. Some of the big landed estates will have to sell off some of their vast tracts to pay IHT which will increase the supply of land for small farmers.
And if the massive increase in the value of farms has been as the result of a speculative bubble then the case for taxing them gets more compelling.
But when bubbles burst people lose out. The last 2 decades of rising land prices have seen massive diversification and innovation from farmers. Farm Shops, camping and shepherds huts on AirBnB, recreation and children’s play areas are only the most visible signs of this. There are British growers of Szechuan chile, wasabi, and the first commercial saffron producer since the Tudor era. Rare breeds, and artisan cheeses. One of the main sources of funding for this was the EU; the EU Rural Development Fund invested hugely in helping Britains farms innovate and diversify.
But this only covered part of the costs. Farmers have borrowed money against the rising value of their land to invest in farm shops, and glamping. If there is a big fall in land values due to the tax changes quite a few will be in trouble. If the falls in land values are steep enough some farmers could be in negative equity. This is why the whole industry will be affected not just a few posh people.
It is easy to mock the farmer’s protests. Mostly well healed people attending a protest at Church Hall which drew a smaller crowd than the London Fortean Society’s Weird Weekend. At last the Forteans got to enjoy UFOs, Bigfoot and the Loch Ness Monster rather than Jeremy Clarkson. It’s hard to shake the suspicion that journalists in the Telegraph and similar papers up in arms about this are worried that the value of their own family estate will take a hit. Viscount Rothermere owner of the Daily Mail stands to get a large tax bill as a result of the changes. Any Union in a dispute with the Government needs to win the battle for public opinion, and that requires more than Jeremy Clarkson losing an argument with Victoria Derbyshire.
But this is going to re-shape the countryside in some parts of the UK. There will be winners and losers, and a awful lot of anguish for a few hundred million for the Treasury.
HM Treasury and HMRC are full of obsessives. Civil Servants with a bee in their bonnet about some tax loophole, or perceived discrepancy. Every time we get a new Chancellor they bombard them with policy papers about their pet hobby horse. Occasionally an incoming Chancellor is naive enough to get mugged like this – George Osborne got conned with the pasty tax and caravan tax. This IHT change looks suspiciously like someones pet obsession that slipped through the net.
Rachel Reeves should experienced enough not to fall into this trap. Which raises the suspicion that she is still thinking like the civil service economist which she once was, lost in niche detail, rather than as a Chancellor with a clear vision for growing the economy and making us all richer.
Most importantly the UK needs to raise taxes to cope with a record elderly population. We are no different to any developed country with an ageing population and a falling birthrate. The Government needs to be able to make the case for the taxes changes which are needed to care for our elderly without running up huge debts. Rather than trying to win that overall argument they have tried to target particular groups who they think will be easier to hit. But raising funds by hitting special interest groups, particularly those with chums in parts of the media, isn’t the same as winning the argument.
And long term that matters more than Barbours in Knightsbridge.
https://www.knightfrank.com/research/article/2024-01-22-farm-values-hit-new-record
https://content.knightfrank.com/research/157/documents/en/english-farmland-index-q4-2023-10883.pdf