Although the farmers lining up their tractors on Whitehall today may disagree, changing the IHT tax regime around farms may be good for the UK economy.
In 2022/23, the UK farming industry received £2.3bn in government handouts to support activities that would otherwise be uneconomical.
Not many other industries receive such a high level of support to fund business activities that can’t generate returns over the long term. In many respects, the UK taxpayer is propping up an industry that is occupying land that could be better used to help tackle the housing shortage, boost energy security, or facilitate high-end manufacturing.
The UK government has steadfastly supported its budget plans for farm estates over £1 million (£2 million for a couple) to pay 20% inheritance tax and shown no sign of backing down, despite nationwide protests over the weekend and today.
There is a weight of economic evidence that supports the government’s argument that the farming IHT relief schemes have artificially pushed up land prices and degraded soil as farmers overworked the land to meet the demands of high land prices.
In a letter published in the Financial Times, Paul Cheshire, emeritus professor of Economic Geography at the London School of Economics, explained how the introduction of farm IHT relief pushed up the price of farmland and did little to support farmer’s incomes:
“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 the 20 years to 2012, the price of farmland increased fourfold.“
“This turned landowning farmers into millionaires but — especially since land represents a cost of production — did no good to the incomes of food producers. It created impoverished millionaires who claimed a need for more support. At the same time, because more expensive land had to be squeezed even harder for the last drop of revenue, the environmental damage caused by intensive agriculture was made worse. Taking at least some of this tax loophole away will do no harm to family farmers but will help both public revenues and the environment.”
Farmers with large estates and low cash levels will have a decision to make. They can pass on the farm and leave it to their executors and beneficiaries to decide how to meet the new IHT liabilities, or they can start selling off land and other assets now to ensure the cash is available to settle the IHT bill on their death.
Either way, the likely outcome is that some large family-owned farms worth over £2 million will sell a proportion of their land.
Farm estates selling off their land to housebuilders or renewable energy providers will reduce the amount of land the government has to pay out subsidies for and provide much-needed land to facilitate the construction of the two things the UK is in desperate need of – new homes and a reliable domestic power supply.
Some may argue that we need to grow more of our own food and that reducing farmland is a bad idea. However, this school of thought is steeped in nostalgia, and the reality is that a large proportion of our food now comes from overseas. The changes in farming IHT tax are simply accelerating a trend already underway.
In addition, many current farming practices are unsustainable, and there are questions about just how long they can continue.
If the UK really wants to take control of food security, we must invest in technology such as vertical farming to boost food production efficiency. Several firms are emerging winners from the first wave of innovation in the vertical farming sector and are now supplying the UK’s major supermarkets. Insect farms are springing up to provide high-protein animal feed, and lab-grown meat is no longer science fiction.
We could use the UK manufacturing industry as a guide for UK farming. The Industrial Revolution saw a boom in activity that gathered pace until it became cheaper to produce most goods overseas, leaving the UK as a base for specialist high-end manufacturing. Apply this to traditional farming, and we become producers of premium livestock, seasonal fruit and vegetables, and importers of low-margin produce.
Ultimately, the tax changes around farm IHT are speeding up the process of repurposing some UK farmland for uses that provide a better economic return.
And we stress ‘some’ UK farmland.
Given that only around 33% of farms are thought to be impacted by the tax, the family farming sector isn’t about to implode. Grains will still be grown, and cattle will still be reared in the UK. The British strawberry will not go extinct.