The APR controversy continues

I am not a tax lawyer, specialist agricultural accountant or land agent, so my advice to farming relatives and other farmers I know is to seek professional advice on the implications of the Government's changes in APR for their businesses.  They have until 2026 to sort things out and in my view the Government should allow an extended period to sort out unresolved succession issues.  Succession planning is often left far too late in farm businesses.

Many farms have diversified and that is a further complication as BPR comes into play as it does on the farm itself.

It has to be noted that the wealthiest landowners in the country have their farms already placed in trusts. There is no doubt, however, that speculators from outside farming have been buying up parcels of land as a hedge against inheritance tax.

Farm businesses still attract a preferential rate of 20 per cent payable over 10 years. The heirs of my relatively modest estate will have to pay 40 per cent and after six months the outstanding sum will attract 7.25 per cent tax.  Probate cannot be secured in that period.

I think it was ill advised to make a further in the basic payment to farmers when the new environmental supports are largely not ready to be used.  Defra has been hollowed out more than any other government department.

Arguments about the numbers

Tax lawyers have questioned Sir Keir Starmer’s claim that a “typical family” farm will receive a £3mn exemption from inheritance tax, calling it “misleading”, reports the Financial Times. The prime minister has repeatedly used the number when defending the controversial Budget decision to impose inheritance duties on agricultural assets above £1mn, saying earlier this month that “the threshold is £3mn” in a “typical family case”.

But lawyers argue that the government’s figure requires farmers to meet complex conditions, including potentially splitting up a farm’s ownership when one spouse dies. “It’s not necessarily that the £3mn figure that’s been bandied about is wrong, it’s more that it’s misleading,” said Emma Haley, legal director at law firm Boodle Hatfield. “The difficulty is there are various traps that can limit the allowance that everyone has.”

The exemption is made up of £1mn of agricultural property relief, which comes in from April 2026; a £325,000 allowance for all categories of assets; and £175,000 for passing on a house to children or grandchildren. This amounts to £1.5mn that can be passed by a spouse directly to their children. Both partners would need to pass this on to reach a £3mn exemption.

However, if a farm is owned by one person or a couple that is not married or in a civil partnership, the £3mn allowance cannot be reached. The residential exemption is also reduced if either partner’s share of the farm is worth more than £2mn, and is removed entirely at £2.35mn. This means that for a couple to reach the £3mn allowance, the first spouse to die would have to leave £1mn of their estate to someone other than their spouse to avoid the value of the second spouse’s estate surpassing £2mn.

The result is that farm ownership would probably have to be split up to qualify for the full relief. “On the first death, you’re going to have to make sure you pass the estate to somebody else and they will then become a joint owner with the spouse,” said Haley at Boodle Hatfield.

“It becomes very messy.”  Camilla Wallace, senior partner at Wedlake Bell, said the £3mn figure was “not likely to be realistic when you drill down” and calculated that £2.65mn was a more likely amount for larger farms to be able to claim.

A government spokesperson said: “Two people with farmland can pass on up to £3mn without paying any inheritance tax. Our reform to agricultural and business property relief will impact around 500 estates a year.” “This is a fair and balanced approach which fixes the public services we all rely on,” they added. The government has said the policy, which applies to farms worth more than £1mn, would only apply to around a quarter of commercial family farms.

But the National Farmers’ Union has said the true figure is three quarters of farms.  While most of the conversation about the relief has been focused on farmers, the same will apply to business-owners as the Budget changed the rules for business property relief (BPR) in the same way as for agricultural property relief. Family farms often have to use both APR for their land and BPR for their livestock and machinery. The Treasury estimated that the changes to APR and BPR would raise a total £1.8bn by 2029-30. Calculations by consultancy CBI Economics estimate that only £387mn of that figure would be from APR.

Why internet storm about Bovaer is mistaken

I was interested to read the following statement from Milk & More who deliver my milk, who no doubt have seen an opportunity to seize a commercial advantage over Arla who are being boycotted by some consumers after an internet and media storm:

You may have seen recent news about the use of the Bovaer additive in the production of some dairy products - an experimental feed additive being trialled by some farms selling milk to larger companies and retailers to help reduce methane emissions from cows. We want to confirm that Milk & More isn't involved in these trials, and neither are the farms we work with. As an independent company, we're proud to partner with British farms that uphold high standards of animal welfare, food safety and environmental responsibility. Our fresh British milk is just as it should be - free from additives, fresh from trusted farms and delivered to your doorstep with care. With Milk & More, what's in your glass is simple: British milk. Nothing more, nothing less. My comment is that there is no evidence that this additive reaches the milk itself and we need to try out ways of reducing methane emissions from dairy cattle.  Unfortunately, one start up that hoped to achieve this objective has just collapsed. Bovaer is used in many countries including major dairy producers. The Food Standards Agency report is here: https://www.food.gov.uk/our-work/annex-m-rp1059-3-nitrooxypropanol-as-a-feed-additive-for-ruminants-for-milk-production-and-for-reproduction

Could land prices come down?

I have been having a bit of a debate on social media with a dairy farmer and former Nuffield scholar.  He says, with justification, that farming is hard physical work, dangerous and offers returns of 0.5 to 1 per cent.

My response was in that case why not sell up, reinvest the capital and have an easier life?   The standard response is that it's 'a way of life'.   I am familiar with this response as my nephew is a seventh or eighth generation farmer.

Of course, it is way of life that people are entitled to choose, but don't complain too much about the hardships.   To me, it doesn't seem an enviable way of life, but opinions clearly differ.

Why are returns from farming so low?   The removal of CAP subsidies after Brexit hasn't helped and it is possible that some farmers are having buyers' regret..  I remember touring the North of England explaining some of the risks to farming audiences during the referendum campaign.

There has been a shift of power down the food chain from farmers to supermarkets that seek the lowest possible prices for their customers.  Farmers' margins have been squeezed.   Supermarkets impose demanding contracts and there have been allegations of malpractice.

However, another factor has been people buying up farmland as a hedge against IHT.  They are not necessarily buying whole estates as in the case of farmers' hero Jeremy Clarkson, but often smaller bundles of land that can be rented out to farms seeking to expand.

According to an AI  overview, 'A variety of buyers purchase farms, including private investors, institutional investors, and lifestyle buyers. In 2023, non-farmers bought more than half of farms and estates sold in England, with private investors accounting for 28% of transactions.'

Will APR's reduction (remember we did not have this relief before the 1970s and 1980s) push down land prices and make it easier for innovators to enter the industry other than by succession?

The honest answer is that I am uncertain.   An interesting article in Farmers Weekly recently argued that land prices revert in the long run to a ratio used at the time of the dissolution of the monasteries by Henry VIII.  But in the long run, as Keynes said, we are all dead.   There have been some big fluctuations in between, e.g., after the passage of the Corn Laws which lay the foundations of a cheap food policy.

As for the APR proposal itself, no new Government is going to U turn on a central element in its budget, even if the revenues to be derived are not great.

However, given the conflict over the likely effects (partly arising because different things are being measured), it is worth having an independent review of the evidence to ensure that the threshold does not affect too many smaller working farms.

Given anecdotal evidence on the number of very old farmers who have not gifted their farms, there might be a case for relaxing the seven year rule for those over a certain age.  Mind you, I would quite like for my children for liable for just 20 per cent over 10 years on my relatively modest estate!

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.