The UK Government’s recent budget where full relief for inheritance tax in agriculture will be discontinued has caused more concern amongst farmers across the UK than I have seen in decades and understandably so writes NFU Scotland President Martin Kennedy.
What is also clear is that there is still some misunderstanding as to why this is such an issue for agriculture.
First of all, the reason Agricultural Property Relief (APR) and Business Property Relief (BPR) were introduced as far back as 1984 and 1976 respectively was to allow the transfer of assets to the next generation without incurring a tax bill that would make it almost impossible to continue in said business without having to sell parts of the asset. For agriculture this is vital, and I will try and explain as simply as I can, why this issue and the UK Government’s budget decision have been taken with the wrong data present.
Margins made in food production by the primary producer are very low. Recently this has been exacerbated by some retailers intentionally selling vegetables way below the cost of production as a loss leader. This devalues food, encourages waste, and forces prices down to the extent it becomes unviable to grow. This production is done on valuable land that often only receives a return on that investment of around 0.5% - 1%. As a result of this low return many businesses have diversified to top up the agricultural business to keep it afloat.
I can’t think of any other business that has to diversify to augment the income of the core business. Can you imagine a garage business, an electrician business, a hotel chain business or indeed any business you can think of saying “I just cannot make enough money to keep this business afloat, I’m going to have to diversify into farming”? I don’t think so.
No one in this industry complains about paying tax on income. In fact, it is very healthy for any industry to pay income tax as that shows the business is making money. What the UK Government is proposing is to tax the asset that is trying to generate that income.
So why is this relevant? Well, given the amount of tax that would be involved, a family farm could not make enough money from producing food to pay that tax bill so would end up having to sell off part of the farm. That would be a double whammy in that not only would that make the farm unviable, but you would also be eligible for capital gains tax. It’s little wonder family businesses are so concerned.
What about the figures that have been used to influence this flawed Treasury decision? Firstly, let’s get a grip on the values. Yes, farmland is hugely valuable, but that value is never realised until the point of sale.
It’s very difficult to say how big a farm needs to be to make it viable as that’s dependent on the type of land and the type of farming business. However, if you take a hypothetical mixed arable and livestock unit supporting a family and one employee then the farm needs to be around at least 400 acres, although many would say that’s not near enough. We’ll put a conservative value of £7,500 per acre, which means the land value alone is £3m.
So, if someone tragically dies, the UK Government says that, provided there is a couple with their name in the business, then with all the relief available, there will be no tax to pay. This is where the incorrect data starts.
These figures are only counting APR. When all the BPR assets are counted, such as buildings, machinery, livestock etc. that could add at least another £1.5m. That would mean a tax bill of around £300,000.
As I said earlier, with the return on investment being so low, a farm of this type would only have an income of around £50,000 in a good year so paying a tax bill of around £30,000 per year for ten years is not doable and completely disincentivises the next generation to continue. This tax bill would of course be double if the business were only in one person’s name.
The UK government also suggests that only around 500 businesses would be affected. Not only is this figure wrong as it was based on a snapshot of 2021 data and values have now considerably changed, but it is also disingenuous on the UK Government to say only 500 are affected.
Agriculture is a generational industry so, over many years, this will affect many thousands of businesses.
What really sticks in the craw is this proposed tax changes from the UK Government will only generate an estimated £500m per annum – ironically, the same amount that’s given overseas in agricultural aid.
Currently the UK government is completely missing the target of those large investors who are using land simply to avoid paying tax.
However, the unintended consequences are family farms, even relatively small ones, who are now under a lot of pressure to hand over the business earlier than expected in the hope people will live for another seven years so the next generation can continue producing food without a serious tax bill millstone round their neck.
In many instances, it’s extremely difficult to hand over too early as not only may the next generation not be ready but also the older generation cannot then be a part of the business.
There are many other ways to hit the required targets, but that cannot be done without consulting with the industry. Surely, they must see sense.
I can guarantee the industry will keep up the pressure until this is reviewed.
We will lobby Labour MPs, our banner and sticker campaign to #StopTheFamilyFarmTax will continue and the UK industry, driven by all four UK farming unions, will once again unite in a nationwide rally on 25 January 2025.