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.

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!