Government gives way on farm inheritance tax

In a Christmas Eve u-turn the Labour Government has backed down on inheritance tax for farmers.  My estate will still attract 40 per cent, but only a minority of farmers will pay 20 per cent over a ten year period.

No doubt farmers will say it was their parades of shiny kit in London that made the difference, but I think a revolt by backbench Labour MPs from rural seats was more significant.  As many as forty of them were prepared to move an amendment to the Finance Act in what would have been a major revolt..

Moreover, it seemed unlikely that the measure would yield significant sums.

Fewer farmers will start paying inheritance tax from April after UK ministers were forced into a £130mn climbdown by a fierce backlash against the policy from rural communities and some Labour MPs. In a surprise U-turn just before Christmas — and with parliament not sitting — the government announced it was lifting the threshold above which farmers will have to pay death duties.

Chancellor Rachel Reeves announced in last year’s Budget that farmland would no longer be exempt from inheritance tax and would be liable for a 20 per cent levy on assets worth more than £1mn from April 2026. But on Tuesday ministers bowed to pressure and announced the threshold would be raised to £2.5mn, meaning that spouses or civil partners with combined estates worth up to £5mn will pay no inheritance tax on top of existing allowances.

Officials said the changes would reduce the number of family estates facing inheritance tax bills to about 1,100, from 2,000 under the original plans (these official  figures have always been disputed by farm organisations).

Only 15 per cent of farms will be liable for the levy, down from 25 per cent under the previous proposals. Introducing inheritance tax on agricultural land had been expected to raise £430mn a year for the government by 2029-30, but that figure is now likely to be £300mn — meaning a net annual cost of £130mn.

Environment secretary Emma Reynolds said the government had “listened closely to farmers across the country” and was making changes “to protect” more ordinary family farms. “It’s only right that larger estates contribute more, while we back the farms and trading businesses that are the backbone of Britain’s rural communities,” she added.

Farming groups have organised regular, noisy protests in Whitehall over the past year, with ministers criticised by opposition parties and some rural Labour MPs. Markus Campbell-Savours, MP for Penrith and Solway in Cumbria, recently voted against the original proposals and was suspended from the Labour party as a result.

A significant number of backbench Labour MPs abstained. David Smith, Labour MP for North Northumberland, said on Tuesday that the government’s decision was “sensible and mature”. Prime Minister Sir Keir Starmer last week met Tom Bradshaw, president of the National Farmers’ Union, who urged him to protect “the vulnerable and elderly” from the tax changes.

Bradshaw said on Tuesday that “while there is still tax to pay, this will greatly reduce that tax burden for many family farms, those working people of the countryside.  Starmer was also spurred into action by last week’s government-commissioned review of farming by former NFU president Minette Batters which found nearly a third of farms in Great Britain were loss making last year.

Batters said the inheritance tax changes had left farmers “bewildered and frightened of what might lie ahead”. One Labour MP questioned the timing of the announcement during the Christmas “dead zone”, saying: “My general view is if you are going to U-turn, reap the political benefits of it and properly argue for it.”

Asked why the change was not in last month’s Budget, a government official said ministers had wanted to “get it right” after a long time engaging with the farming industry.

I do hope that despite this policy change farmers will take succession planning more seriously and allow younger family members more say in the running of farms.

It also seems to me that the Government has spent a lot of political capital and been distracted from other issues while gaining very little in fiscal terms: this also applies to the winter fuel allowance.

Of course the animal welfare strategy just announced by the Government has also raised concerns in rural areas, in part because of production restrictions on pigs and poultry that di not apply to imported food and in part because of the proposed ban on trail hunting.

Food production is no longer profitable

Minette Batters has completed her review of farm profitability which some see as the Government using the former NFU president as political cover.

Nevertheless, I agree with her that Defra has lacked good political direction, being treated as an up or out way station for ministers (my words, not hers).  It pains me to say it but the only minister who showed any real leadership was Michael Gove,   Certainly not Liz Truss with her selfies and disastrous trade deals.

Batters reckons that Brexit left a policy void created by exit from the CAP (in my view something better could have been put in its place but wasn't.)

For the average farm, food production itself is no longer profitable, the report found. In the 2023-24 financial year, the average English farm made a net loss on agricultural activities, with state funding and diversification out of farming “providing the bulk of an average farm’s income”. 

Rising input costs such as fuel, fertiliser and animal feed following Russia’s invasion of Ukraine — as well as increasingly volatile weather — have battered confidence in the sector, the report found. But constant shifts in government policy, including the swift removal of agricultural support schemes, had weighed on real farm incomes. 

In March the government suspended one of its post-Brexit support schemes, the sustainable farming incentive, because the budget had run out, leading to a sharp drop in income for many farms. The government has not confirmed when it will be restarted. 

In 2023-24, the average income from farming in Great Britain was £41,500 per farm. A review by land agents Strutt & Parker found fewer than half of England’s farms made more than £34,500, the minimum income they define as economically sustainable.

In addition farmers are still smarting from the (partial) imposition of inheritance tax where a prolonged campaign has led to only minor government concessions.

Farm returns fall but little benefit for consumers

Farmers are known for complaining, but right now they may have a point. Agricultural commodities such as grains and sugar have plummeted on futures markets as global supplies have surged. European farmers are suffering in particular as they contend with high input costs and increasingly competitive global rivals.

Benchmark wheat futures in Paris have fallen more than 20 per cent this year to multiyear lows, dragged down by bumper harvests in Russia, Australia and parts of South America. Meanwhile, speculators are building bets on further price falls, with investment funds adding more than 280,000 new short lots in milling wheat futures in the week to November 21, extending their net short position, according to Euronext data. For UK growers, the fall has been brutal. Wheat prices are now little more than half the levels reached in 2022 following Russia’s invasion of Ukraine. Yet fertiliser, fuel and machinery costs — inflated during the energy shock — have barely retreated.

For arable farmers in Europe, “it’s not a happy situation at all,” Ole Hansen, head of commodity strategy at Saxo Bank told the Financial Times. There is a big gap between “the cheap crop that leaves the farm gate” and the price of bread “when it hits the store”, he said. While the upcoming harvest in Norfolk looks promising, the UK’s wheat yields at this year’s harvest fell after last winter’s torrential rain. But because international markets are well supplied, that does not translate into higher prices.

The financial squeeze is prompting visible restructuring. Brown & Co, the UK’s largest dedicated agricultural auctioneer, said the number of agricultural machines being put up for sale has risen sharply. “It’s become hard to find a day of the week without an auction,” said partner Simon Wearmouth. “I’ve never known the calendar this crowded.”

Even as grain markets sink, UK shoppers have seen little relief in the cost of bread, beer or baked goods. That is because the raw commodity typically accounts for only a small fraction of the retail price. In a loaf of bread costing £1.50, wheat may only account for 16.5 pence to 22.5 pence, according to Financial Times calculations based on research by the Agriculture and Horticulture Development Board, while barley only accounts for a small proportion of a pint of beer.

Energy, packaging, transport and processing costs and retail margins are the main components of the final price. Annual food inflation in the UK was 4.9 per cent in October, up from 4.5 per cent in September. The rise has been driven by five products — beef, butter, milk, coffee and cocoa — where supply shortages globally have pushed up prices.

Across the Channel, growers say the situation is similarly dire. In France, where sugar beet is a flagship crop, producers describe a sector under existential pressure after global sugar prices plunged almost 50 per cent over the past year.

Concessions for South Africa, Mercosur countries in South America and traditional cane exporters have added to supply on a market where European consumption is flat or declining. The result, has been factory closures, with six sites shutting in France since the end of EU sugar quotas in 2017, with more expected if 2026 prices fail to recover.

Producers on both sides of the Channel emphasise a structural problem: Europe’s high environmental and labour standards, while politically popular, make production significantly more expensive than in major exporting nations. In Brazil and India, cane cultivation benefits from favourable climates, large vertically integrated estates and looser rules on pesticides and labour.