Big changes in the agricultural budget

Alan Matthews notes in a thorough and authoritative analysis that the repurposing of the agricultural budget in England has been the most extensive in a developed country since the New Zealand reforms in the 19http://capreform.eu/agricultural-policy-reform-in-england-and-the-2024-uk-budget/80s:

Vacuuming up good farmland

Given the debate about the impact of recent proposed changes in APR on 'family farms', it is as well to remind ourselves that there are some big estates in England and not just those held in trust for the likes of the Duke of Westminster.

Sir James Dyson, the billionaire inventor of high-tech vacuum cleaners, has become an outspoken critic in recent weeks of Britain’s plan to reintroduce inheritance tax for farms. He should know: his farming empire alone could result in about £122mn in death duties. The entrepreneur — who sparked controversy by supporting Brexit then moving his eponymous technology company’s headquarters from Wiltshire to low-tax Singapore in 2019 — has developed one of the UK’s largest farming businesses, owning some of the country’s most productive agricultural areas.

The 77-year-old tycoon — who says he has a mission to “protect and nurture” British farmland — has been able to expand his agricultural business over the past decade free of the threat of death duties. The company says it has invested a total of £140mn to upgrade its farms. Dyson Farming owns at least 36,000 acres, the group says, across Lincolnshire, Oxfordshire, Gloucestershire and Somerset. It recorded profits of £5.2mn in 2023, up 10 per cent from the previous year, according to the company’s accounts. The group is now one of the top five UK producers of wheat grains, malting barley, oil seeds, peas and potatoes.

Chancellor Rachel Reeves proposed changes in last month’s Budget to measures that soften the impact of death duties: agricultural property relief (APR) and business property relief (BPR), which were designed to ensure the survival of family and farm businesses after the owner’s death. 

 “You can find cases of people who have specifically said they purchased land for the purpose of acquiring this tax break,” Arun Advani of the Centre for the Analysis of Taxation told the Financial Times.. “There are lots and lots of problems with the way we tax the transfer of assets between generations in the UK. This Budget closes some of the gap.”

From April 2026 farm business owners will have to pay IHT at a rate of 20 per cent of the value of their estate, beyond a £1mn cap.   (In practice for some family farms thiis threshold could be £3m and it can be paid off over ten years). With £612mn in net assets in its annual accounts, the changes could translate into about £122mn in duties for Dyson Farming, according to the Pink Un's estimates.

It was “wrong to assume that my investment in farming is to avoid inheritance tax”, Dyson wrote in a letter to The Times in 2019. “There are far simpler and less risky ways of achieving it than buying farmland.” A spokesperson for Dyson said that the changes to IHT introduced in the Budget would “severely undermine” efforts to improve the UK’s food security. “The Dysons’ motivation has been to bring new thinking and new technology to promote sustainable agriculture, to produce high quality food for the British market and to improve UK food security,” they said

According to the Land Registry, privately owned Dyson Farming owns 185 separately listed properties, with the bulk of the purchases coming between 2013 and 2016. In some locations, such as around Carrington in Lincolnshire, he has strategically assembled large tracts of land by buying up neighbouring properties.

Carrington and Nocton, Dyson Farming’s two major farming hubs where the head office is located, make up two-thirds of all farmland owned by the entrepreneur.  “Lincolnshire produces a third of the UK’s fresh food and has very good soil, very big fields, a good rural agricultural community, and good skills,” Dan Cross, managing director of Dyson Farming, said in an interview. “If you want to be scale farming, [it’s] a great place to start.” 

Farmageddon?

Changes in agricultural property relief are leaving farmers threatening to take their tractors to Westminster later this month and to spray manure on the capital's buildings, hardly likely to win sympathy for their cause.

The changes introduced by Rachel Reeves are an attempt to stop wealthy individuals investing in farmland to reduce their inheritance tax liabilities.

I should emphasise that I am not a tax lawyer and given that the changes don't come in until 2026, individual farm businesses would be well advised to seek appropriate professional advice.  To judge the effect of the measures, I would need to have better data about individual farms that often have complicated structures, e.g., some land is rented,

The new £1m threshold after which tax will apply at a reduced rate of 20 per cent is in addition to the existing nil rate bands which can offer as much as £1m of protection, hence many families would qualify for £2m a relief.

The Country Land and Business Association estimates that 70,000 farms will be affected, Rachel Reeves says that three-quarters won't be.   The final figure will be at the lower end of the range, in part depending on how many work arounds professional advisers can discover,   It does not mean the end of family farms, but it does pose a new set of challenges.

An interesting and well argued article by a farmer defending the decision: https://www.theguardian.com/commentisfree/2024/nov/08/farmer-glad-tax-loopholes-investor-landowners-inheritance?CMP=Share_iOSApp_Other

Farming tax targets for the Chancellor

Agricultural tax breaks are likely to be a target for Rachel Reeves as she looks for new sources of tax revenue that do not break Labour's election pledges.

First in the queue is agricultural property relief which allows owners of farms to pass on the assets in their totality free of inheritance tax during their lifetimes or in their wills.

The rationale was that it allowed succession on working farms which would otherwise be prevented by a substantial tax burden.  In practice it has encouraged wealthy individuals from outside agriculture to buy up farmland as there is no upper limit on APR (think Dyson).  

The tax relief has pushed up the price of farmland and has thus made it more difficult for new entrants to come into the sector, compounded by the reduction in local authority tenancies which offered a first step on the ladder.

However, even if APR were abolished or capped, most farmland would still qualify for business relief on inheritance tax.

What could be abolished is rollover relief on capital gains tax.   If a farmer sells land for development, it can be 'rolled over' into the purchase of farmland without attracting capital gains tax.

Given that Reeves is thought likely to increase fuel duty, albeit probably only marginally, 'red' diesel tax relief for farmers becomes even more valuable.   However, given rising input prices, uncertain harvests and volatile output prices affecting cash flow, this is likely to be left alone.

Plenty of holes in Defra Farming and Countryside plans

The National Audit Office has reviewed Defra's Farming and Countryside programme and has a number of criticisms to make.   

The Farming and Countryside Programme aims to fundamentally change England’s farms. The stakes are high for the environment, food production and the viability of the sector. To achieve the Programme’s objectives, many farmers need to transform the way they farm, and Defra’s modelling shows the extent of productivity improvements that are needed for farm businesses to maintain viability.

Take-up of schemes is rapidly increasing, but some of what Defra is paying for now are actions that, for many farmers, do not result in significant immediate change to farming practices. Instead, they are expected to encourage farmers to do more for the environment in the long-term.

Defra expects the removal of direct payments to stimulate most of the required productivity improvements. It says it has seen some improvements already as farmers adapt to life without direct payments, but the evidence is inconclusive on whether the scale of change needed will be achieved.

Farmers need quality advice and support to adapt, but Defra has not yet ensured that they can access what they need. Around half of England’s farmers say they are not at all positive about their future in farming.

The Programme will continue to change, but Defra has not yet provided a long-term view of how it expects the Programme to develop, for example, in terms of the balance of funding between SFI and more ambitious schemes.

Defra’s iterative approach to Programme design makes it difficult for farmers to plan their businesses to remain viable, to continue to produce the food we need and to achieve the Programme’s environmental objectives. Currently, gaps in the Programme’s data on environmental outcomes is limiting Defra’s ability to fully understand the impact on the environment, or whether it is on track to achieve value for money.

Full report here: https://www.nao.org.uk/wp-content/uploads/2024/07/farming-and-countryside-programme-1.pdf

Food security for some

The UK Government has produced its new food security index using nine indicators which it claims paint a 'broadly stable' picture: https://www.gov.uk/government/publications/uk-food-security-index-2024/uk-food-security-index-2024

Writing in the Financial Times today, Professor Tim Lang says that the indicators 'ignored internationally agreed definitions and indices of food security.'  He points out that food prices are 25 per cent higher than a few years ago and that a Food Standards Agency classified 25 per cent of consumers as food insecure. Poor diets feed through to healthcare costs.

No longer a single farming voice

Some interesting reflections by the president of the UK Agricultural Economics Society on recent farmer protests in Europe: 'The response to the grievances has been a mix of grant concessions and delayed policy decisions, reinforcing the argument that the farm lobby has a political importance which vastly outweighs its significance in terms of standard economic indicators.'

'Within the UK, I have found the diversity of reactions to the demonstrations from within the farming community interesting. Increasingly there no longer seems to be a single farming voice. Instead, just as the priorities that the sector is asked to address have widened so too has the range of interest groups with debate intensifying. For example, behind the headlines, positions of the more traditional farm lobby groups have been challenged on social media platforms by farmer-led groups concerned with soil health, food sovereignty, and diversity in the farming community, and through debates on the relative importance of food and environment in agricultural policy and practice.'

'The Oxford Real Farming Conference from 2010 was perhaps an early indication of this trend and the growing success of the Groundswell Agriculture Festival focus on regenerative farming systems. Agricultural economists have long recognised different motivations and styles of farming (see Hill, B. and Bradley, D., Journal of Agricultural Economics, 2024. Goals and values of farmers revisited: Gasson fifty years on). It seems more important than ever that we understand and recognise changes occurring in agriculture’s political economy if we are to fully support the transitions required in the sector to address climate and biodiversity crises.'