'We'll have to get more militant': The real winners and losers from the farm inheritance tax debate

Labour’s plans to bring in inheritance tax on farms have ignited a political row. Thousands protested in London, and the airwaves have been full of stories of farmers who say the tax will put them out of business despite owning land worth millions.

The National Farmers’ Union (NFU) claims the change will “snatch away much of the next generation’s ability to carry on producing British food”. 

So what’s the real story? Big Issue has got into the details to find out the winners and losers of Labour’s farm tax.

The farmer’s perspective: ‘There’s no way we can magic that money up’

Sam Slade works on his family’s 200-acre turkey farm near Exeter. The farm makes no profit and he doesn’t take a wage from it, he told Big Issue. By his estimates, the farmland is worth £3m, with an extra £2m of value in the farmhouse, buildings and equipment.

With his dad owning the farm on his own, that would make for an inheritance tax bill of approximately £800,000. “Unfortunately the very wealthy do gobble up all the land. Farms now, we’re lucky to get the land, but we’ve just accepted it, and we just farm what we’ve got,” he said.

“There’s no way we can just magic that money up, without the farm being affected or selling off the land. If we sell off the land, the farm becomes less productive,” said Slade. “We just wouldn’t do it.” Even paid over 10 years, at £80,000 a year, it would be crippling, he said, with the family also paying back loans taken out to buy farm equipment.

“Farms do go under already, without this added stress,” he added. The family has been meeting with their accountant, but without concrete information it has been hard to plan.

“I think it’s just a land grab at the end of the day. They want to build all these houses, they want to do net zero, they need the land to do it,” he said. He predicts food security will drop if the changes go through, with the country importing more food and increasing its carbon footprint.

For now, he is hoping the government will reverse the changes – or fall before it can implement them. If not, he predicts farmers may start blocking depots and ports. “At the end of the day, if they don’t listen, then we’ll have to get more militant,” Slade said.

What’s being changed with farm inheritance tax?

Farmland has been exempt from inheritance tax since 1992, thanks to agricultural property relief (APR). Labour’s budget changed that.

Now it’s being staggered. The first £1m will be tax free, but after that farmers inheriting land will be subject to 20% tax. Usually inheritance tax is levied at 40%. What’s also changing is that other assets such as machinery and buildings, previously counted separately, is also being counted towards this £1m threshold.

Labour says land is being bought up by non-farmers to get around inheritance tax, and that the changes will bring farmland closer to other types of land.

Couples who jointly own farms will be able to pass on up to £3m tax-free to their children, but only if they do not have any other assets outside the farm.

Those paying the tax will have the option to pay it over 10 years, interest free.

There is also an exemption for gifting assets if a parent passes the farm on and then doesn’t die within seven years.

‘At the moment, you can’t buy a farm because they’re so expensive’

Farmers have found themselves with farms which are incredibly valuable on paper, but produce little annual income, explained Jo Michell, professor of economics at the University of the West of England.

“My hunch is that the value of farmland is substantially inflated because of its use as a tax avoidance instrument,” said Michell.

Take an example: those who choose to pay their inheritance tax bill back over 10 years would face a bill of 2% of their farm’s value (above the tax threshold) each year. On a farm worth £4m (with £3m being taxable) yet with a profit of just £40,000, a £60,000 annual bill (as the first £1m is exempt) could tip farmers over the edge.

But compare this to your savings account, which might generate a return of 4-5% a year. “Risky business, and farming is a risky business, should generate a higher return,” said Michell. “To me, it suggests there’s something distorting the market, and making farm prices substantially higher than they should be based on just the profit yield.”

Over time, the change could see values returned to normal. For those willing to wait and pass their farms on, this should have little impact. In fact, said Michell, if the tax does reduce values, many who expect to be hit by the tax could see their farm losing value to the point it won’t be taxed.

Cheaper farms could also allow more people to enter farming. “At the moment you can’t buy a farm because they’re so expensive, so you can’t get into farming,” said Michell.

But those planning to sell, or reliant on their farm’s value for insurance or borrowing, could be hit hard by the change. “Getting from where we are now to a more rational market structure is going to be very disruptive, and it’s going to hurt some people who probably don’t deserve to be hurt quite badly,” said Michell.

A dispute over figures

Labour also says just 500 farmers a year will be affected. But that’s the subject of a fierce dispute. That’s because two changes are being made at once. Not only is inheritance tax being introduced on land (changing APR), but it is also counting what was previously exempt under business property relief (BPR). This is being combined into a single £1m allowance.

It means farmers also have to pay inheritance tax on assets beyond land such as machinery – and this will now count towards the £1m threshold.

Labour’s figures say 27% of farms claiming APR were above the £1m threshold. Critics say this combination has not been accounted for in the headline figure of 500 farms. The NFU says Defra figures show 66% of farms, with land and assets taken together, are worth more than £1m.

Statistics also show over half of farms which claimed APR relief received no income from agriculture in the five years before the owners’ death.

Are there any alternatives?

The anger from farmers appears to be a boiling-over of long-running discontent, say experts, including the shift away from European agricultural subsidies and the slow rollout of the government’s replacement.

Inheritance tax may produce a “small divot” in farmland prices, but it will remain valuable due to being a productive asset, said Guy Garrod, professor of environmental and rural studies at Newcastle University. Instead, the threshold could be set beyond Labour’s planned £1m. “Maybe increasing the threshold would be a way of clobbering those bigger landowners who take advantage of the allowances while being kinder to the smaller family farms,” Garrod said.

Garrod added that Labour’s move may lead to more uncertainty for tenant farmers, who work land owned by someone else, by increasing the incentive for the owners to put the land to other uses.

Robert Palmer, executive director of Tax Justice UK, said: “The status quo has encouraged wealthy investors to buy up farm land pushing up prices, hurting ordinary farmers. While they could have been designed better, for example with a more graduated tax rate, ultimately these changes are about raising desperately needed resources for public services, which are in a dire state.”

At the end of it, however, farmers need more far-sighted support, said Michell

“Over the longer term, there’s not been any meaningful agricultural strategy in the UK,” he said. “Farmers do, I think, need fiscal support, but it’s far from clear that the right way to do it is by effectively turning farms into tax avoidance instruments.”

Do you have a story to tell or opinions to share about this? Get in touch and tell us more. This Christmas, you can make a lasting change on a vendor’s life. Buy a magazine from your local vendor in the street every week. If you can’t reach them, buy a Vendor Support Kit.

Big Issue is demanding an end to extreme poverty. Will you ask your MP to join us?