Losing the plot

Farmers should pay their fair share of tax. But this Budget wasn’t remotely fair.

[Photo source: Andrew Hill, Farm and farm shop, Morthen]

The population needs feeding. So we need farmers to keep farming. And, when a farmer dies, we need him or her to pass the land on to someone who will continue farming it.

Without that continuing cycle of farms being handed down from one farmer to another, there would have been a national food supply problem. That is why, for so long as farmers kept to their part of the bargain – passing their land on to someone who continued farming it – previous governments recognised that it would be utterly counterproductive to take a huge tax bite out of a farm just because death had resulted in a different owner taking over the same essential service.

The current government thinks differently. They have decided to levy inheritance tax on the value of the farm above a certain threshold. (I’ll have more to say on that sneaky word “value” in a moment, but first, let’s focus on the principle of this idea. Or, rather, the complete lack of principle.) If a sizeable chunk of tax has to be paid – more than the farmer can meet out of their other assets or their annual earnings – the owner will need to sell part of the farm in order to raise enough money to pay the tax.

For so long as this new tax rule remains in force, successive generations of farmers will have to break up their land into successively smaller farms in each new generation. Worse still, if buyers use the land for something else, some land may cease to be farmed at all. At best, individual farms will occupy smaller plots of land and at worst – because this government has completely lost its own plot – less land will be farmed.

It is said that farmers can avoid the new tax by passing the farm on to a successor more than seven years before they die. This appears to follow from the general exemption from inheritance tax that applies to any asset passed on more than seven years before death. But this exemption is largely a red herring in cases like this. Passing the land on cannot be a mere paper transaction between family members. The exemption applies only if the parent farmers stop living in the farmhouse and cease to benefit from any earnings generated by the farm. Where are the parents to live? What income are they to live off? It takes decades to build up a pension fund: the Chancellor gave farmers less than 18 months’ notice of this swingeing change.

Farmers are not alone in facing this inheritance tax change. Until this Budget, private businesses have attracted a similar form of relief from inheritance tax when passed on at the death of the owner. That relief will also be halved by the Government at the same time as the farming relief is cut.

Of course, not all businesses are as essential to the nation as farms, so the argument against the taxation of inherited businesses is not quite so strong. But this is a Government that has put restoring growth at the top of its agenda. Why on earth does it want to take financial lumps out of family-owned businesses just because one member of the family has died?

There is an added twist where farms are concerned. If a farmer stops farming and puts the property to other uses, the land can potentially make a lot more money for the owner. Government figures show that, on average, farms make a return of barely 0.5% pa. It would make overwhelming economic sense for farmers to do something else with the land. Or they could sell the land and invest the money in any safe investment. They would make a much better living. But it wouldn’t be good for the country. We, the people, need farmers to use their land in a way that doesn’t make the best use of its potential value. We need the state to encourage farmers to carry on farming. Protection from inheritance tax was a very real financial encouragement.

And here is the sting. When it comes to inheritance tax, the land will be valued at its open market value, not its value in use as a farm. There is nothing fair in the state saying it wants people to farm and then taxing them on the basis of a land value that the land cannot achieve so long as it continues to be used as a farm.

The Government’s Environment Secretary Steve Reed says: "It's only right that we've had to ask the wealthiest landowners and the biggest farms to pay their fair share". This is utterly disingenuous. Creating a financial disincentive to farm is not right for the country and taxing a farm on the basis of a value the farm couldn’t achieve is not fair for the farmer.

What will likely happen is that, when a farmer is forced to sell some land to pay off the inheritance tax, they may look for another farmer to buy it, but there will be a financial incentive to sell to a buyer who wants to do something other than farming – for example, development. That way the farmer faced with inheritance tax to pay can minimise the amount of land that they need to sell in order to meet their tax bill. But the country will have less land in use as a farm.

The Government seems unlikely to do a complete U-turn. But there is a way to restore common sense (and economic sense) and yet save face. The 100% exemption should be reinstated for farms so long as the inheritor of the farm continues to farm it and does not sell up. If, at a later date, they decide to sell, or to cease farming, they should pay a delayed inheritance tax at that point. If they cease farming, but keep the land, it would be perfectly fair to base the tax on the land’s newly enhanced value. If they sell, the tax should be based on the actual proceeds achieved from the sale.