The controversy surrounding Rachel Reeves’ decision to impose inheritance tax on farms just won’t go away. Former adviser to Tony Blair John McTernan provoked a nationwide backlash for his comments suggesting that we can do without smaller farmers, who should be crushed by the Government in the same way Margaret Thatcher defeated the miners.
While Government sources expressed frustration with McTernan’s comments, (which rather gave the game away that the Government is taxing a group of people it neither likes nor cares about) it remains committed to the policy.
It has also emerged that the Treasury did not consult the Department for Environment, Food and Rural Affairs before announcing the tax rise. This is typical Treasury behaviour. The department famously never consults with the rest of Whitehall on the measures that go into the Budget. However, if this tax unravels politically, it shows the weakness of this approach. The National Farmers’ Union claims that the tax will affect far more estates than the Treasury estimates, and it will lead to the break-up of many otherwise economic family farms.
If McTernan’s comments are any indication of the Government’s thinking about the issue, then it seems that the policy has been made on false pretences. As many have now highlighted, the £1 million estate value threshold where this tax kicks in is tailor-made to hit medium-sized farms, according to current land prices. This means that uneconomic small farms are protected from this tax, while viable businesses are directly targeted by it. Small farms are more dependent on subsidies, and they are more likely to be purchased by people trying to avoid inheritance tax on expensive urban property.
Instead of encouraging greater consolidation and larger farms – after all, the inheritance tax bills will only increase with farm size – many fear that this will decrease the size of farms, putting viable medium-sized enterprises out of business, replaced by small farms which get generous subsidies for anything from re-wilding to installing solar panels. Growing food seems to be a secondary concern.
In response to farmers’ anger about the change to IHT rules, the Government has said it will spend £5 billion of taxpayers’ money on projects intended to increase the sustainability of farming. These include hundreds of millions of pounds spent on tree planting and restoring peat bogs. While one can debate whether these are worthwhile projects in isolation, it is a strange sweetener for the Government to offer in return for a tax bill.
Firstly, the £5bn is supposedly going to be spent over the next two years. The inheritance tax grab is scheduled to kick in from 2026 and is projected to raise around £500m by the end of this Parliament. In three years of operating, it will raise less than half of the amount of money the Government intends to spend on tree planting. One wonders why they do not cut subsidies for uneconomic projects like these, instead of increasing taxes.
Secondly, grant-funding for sustainability projects is not a like-for-like replacement for a tax bill. A cattle farmer who owns a 200-acre farm – which would be worth around £2m – is not likely to feel placated by a grant to plant trees when faced with a six-figure tax bill he cannot pay. It demonstrates a woeful misunderstanding of what farmers do, what they want to do and indeed what the public would like them to do, which is to grow food for the nation. Peat bog restoration doesn’t lead to roast beef on the kitchen table.
Taxing with one hand and subsidising with the other has led to an incoherent mess when it comes to British farming policy. Grants of varying sizes are available for farmers to encourage anything from increasing biodiversity, delivering Net Zero, adopting new technologies to increase productivity, increasing the number of pollinators, defending against floods and anything in between. Given that standard subsidies offered to all farms – the Basic Payment and delinked payments – are being phased out, soon subsidies will be almost entirely devoted to sustainability, mitigating climate change and things like rewilding.
In this context, it is hard to consider farms private enterprises at all. Increasing their tax bill will only make this situation worse, making British farmers more dependent on state subsidies instead of allowing them to flourish as the businesses they are. It is a grim irony that a measure intended to increase tax revenue will likely end up costing the state more money in subsidies offered to smaller, less productive farms.
The Government should take the opposite approach. It should abolish inheritance tax, and wind down unproductive green subsidies for farms. Inheritance tax is consistently the most unpopular tax in the country, and its existence causes distortions which lead to poor investment decisions. It is beyond dispute that people buy agricultural property to reduce their tax liability, but setting the threshold at £1m will wreak destruction on many working farms, while raising it much higher would bring in negligible revenue. This is why previous governments always refused the Treasury’s suggestion of levying such a tax. Far better to take a simpler, more radical and certainly more popular approach to ending this distortion: scrap inheritance tax altogether.
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