Written evidence submitted by the NFU and TFA on Agricultural property relief and Business property relief

Environment, Food and Rural Affairs Committee Select Committee

Written evidence submitted by the National Farmers' Union of England and Wales 

Agricultural property relief and Business property relief

November 2024

Executive Summary

       The National Farmers' Union (NFU) is the largest organisation representing British farmers and growers in England and Wales.  We represent 45,000 farming and growing businesses. In addition, we have 20,000 NFU Countryside members with an interest in farming and rural life.  Our purpose is to champion British agriculture and horticulture, to campaign for a stable and sustainable future for British farmers, creating the right conditions for a thriving British farming sector including promoting the health, safety, and wellbeing of our members. In 2022, the UK's agriculture food and drink industry employed 4.2m people and in 2012, the agri-food sector contributed £127 billion in national GVA to the UK's economy. 

1.1.         Inheritance Tax reliefs such as Agriculture Property Relief (APR) and Business Property Relief (BPR) give certainty to family farms that they will be able to keep the farm in the family. Without reliefs such as APR, a farmer's family will often have no alternative but to sell the farm to pay the Inheritance Tax. Currently, for farms, APR is given in priority to BPR, but BPR can potentially apply to the value of assets in the farming business that are not covered by APR.

1.2.         APR is not a ‘loophole'. It is a specifically designed policy, introduced in the Inheritance Tax Act 1984, to protect Britain's family farms from being sold and broken up. For this reason, governments of all parties have retained APR. While in opposition, Defra Secretary Steve Reed provided multiple reassurances[1], publicly and privately, that Labour had no intention of changing APR.

1.3.         When you make a promise to farmers, you keep it. So, the NFU is incredibly let down by changes to APR and BPR announced in the Budget. We are clear, the changes outlined to IHT reliefs will snatch away much of the next generation's ability to carry on producing British food, plan for the future, deliver for the environment and generate clean energy – all of which are apparently key priorities for this government.

1.4.         The government has seemingly failed to grasp that family farms are not only small farms, and that just because a farm is a valuable asset, it doesn't mean those who work it are wealthy. Every penny the Chancellor saves from this will come directly from the next generation having to break up their family farm. Defra have said that the changes will have no impact on three quarter of farms. The NFU disagrees, and Defra's own figures show that a huge number of farms will be within scope.

1.5.         Alongside changes to APR, Defra announced the phase out of the old farm support schemes would be accelerated, amounting to a significant cut to farm incomes, at a time when their replacement schemes still leave many farm businesses locked out. Together with wage rises and added costs to businesses that apply across the economy, these policies raise serious questions about the future of British food security and the impact on food supply and prices.

1.6.         The government should keep their promise, reverse the changes to APR and BPR and abolish what many are now calling the ‘Family Farm Tax'.

Overview of changes to APR

       The Chancellor announced that the Government will change APR and BPR from April 2026. In addition to the existing nil-rate bands, the 100% rate of relief will continue for the first £1 million of combined agricultural and business assets and will be 50% thereafter. The NFU were opposed to any change on APR which we made clear in our Budget submission to the Chancellor.
 
2.2.    The government confirmed it will extend the existing scope of APR from 6 April 2025 to land managed under an environmental agreement with, or on behalf of, the UK government, devolved governments, public bodies, local authorities, or approved responsible bodies. The NFU called for an extension to APR to ensure that farmers were not deterred from entering into environmental schemes for fear of losing Inheritance Tax relief. This important provision will now be undermined by the wider reforms to APR and BPR announced in the Budget.

2.3.    In addition, unused pension funds and death benefits payable from a pension will be included in the value of estates for Inheritance Tax purposes from 6 April 2027. This could affect farming families that plan to pass over non farming assets to non-farming heirs.

Number of farms impacted

The NFU strongly dispute the claim that 73% of farms won't be impacted by these changes.  They are based off historical APR claims which do not accurately represent the impact on the industry.  These historical figures miss the fact that many APR claims would have been alongside BPR claims (aspects of the business that didn't qualify for APR) – making the APR claim smaller and unrepresentative of the total worth of the farm.
 

3.2.  Furthermore, HMT's figures on APR are skewed by a “long tail” of very small holdings. Nearly 40% of holdings who claim APR in England are under 20 hectares. This accounts for barely 4% of the farmed area. Many of these wouldn't qualify, in a conventional sense, as “working farms”.  

3.3.  Defra's own figures show that 66% of farms have a net value of over £1 million.  Taking an illustrative land price of c.£10k per acre, Defra's statistics show that 42% of farms (in England) are over 50 hectares, and these would fall well above the £1m threshold on bare land alone (so ignoring other assets in the business). This accounts for 89% of farmland.

Importance of PR and BPR to family farms

We IHT reliefs give certainty to family farms that they will be able to keep the farm in the family.  Without APR or BPR, a farmer's family will often have no alternative but to sell the farm to pay the Inheritance Tax. A small family farm can have a notional high asset value but very low income and liquidity.  For instance, a comparatively modest 200-acre livestock farm could be valued at £1.5m, well over the IHT threshold. But given the very marginal income profile of such farms, any potential successor would likely have no way of meeting death duties without selling the farm.

4.2.  The resulting breakup of many family farms on the death of an owner, particularly smaller farms where there is little alternative source of income or wealth, could have a particularly devastating effect on more deprived rural communities which have small family farms at their heart. With the spectre of a sizeable IHT liability on death, there would be little incentive for a small farm business owner to take the long-term outlook and to invest in the future of the business that is crucial to boosting economic growth in agriculture.

Importance of APR to the tenanted sector

These changes could also result in a significant contraction in the amount of farmland available to rent. Around two thirds of working farmers rent some or all of their land, so rented land is critical to the UK agriculture industry.

5.1.  The changes announced in the Budget mean that landowners will lose the tax advantage of owning farmland, which in many cases will be made available to tenants. Instead, they may seek to use their capital for investments with higher returns, contracting the availability of land for tenancies.

5.2.  Any significant constriction of land available to rent would have widespread adverse economic implications across the industry compared to any exchequer revenue raised. For those currently renting all or most of their land, losing even part of their rented land could make their farm business unviable and, where they also rent the farmhouse, it could make them homeless. Clearly this would also have national implications for UK food production, and food security. 

5.3.  Around a third of farmland is rented with approximately 50% of this being rented for a fixed period under a Farm Business Tenancy. This can be taken back by the owner at the end of the fixed period. For older long-term tenancies there could be an incentive for the owner to dispute the eligibility of a successor to the tenancy, look for breaches, or negotiate to take the land back. Any of these could create tensions in even the strongest tenant/landlord relationship as the landlord would have such a strong incentive to take back the land.

5.4.  The NFU believe APR has helped drive investment in the industry, with people buying farmland which can then be made available to tenants who go on to have thriving businesses. This is a crucial aspect of getting young people and new entrants into farming at a time when there is a skills shortage within the industry.

5.5.  Therefore, changing APR, particularly with such a low threshold, makes this kind of investment a lot less attractive. We will likely see many people who may have bought and then let out land for farming (which is necessary to qualify for APR) rethink this and hence we would see the contraction of the tenanted sector.

Written evidence submitted by Tenant Farmers Association (WOD0002)

Although the Select Committee has invited the DEFRA Secretary of State to give evidence on the work of his Department, given the ongoing concerns arising from the Budget Statement on 30 October and in view of the gatherings taking place in London as you meet, The Tenant Farmers Association (TFA) believes it would be appropriate to use at least some of the time you have with the Secretary of State to discuss what input he is having to the ongoing discussions with the Treasury in respect of the issues of concern that have been raised.

The TFA believes that what has been announced in respect of the changes to Inheritance Tax relief has unintended consequences for the tenanted sector of agriculture and a large number of small, family tenant farms.

Whilst understanding the context of the Budget measures, we are quite sure that the Chancellor of the Exchequer did not appreciate the impact of her measures on hard-working family tenant farmers who, whilst not directly impacted, are certainly hugely impacted indirectly. As the responsible Secretary of State for the let sector of agriculture, it behoves Mr. Reed to ensure that the Treasury is indeed now well briefed on the impacts and what it might do to mitigate those impacts.

To put things into context, around 30% of the land within England and Wales is farmed under some form of tenancy agreement. Half of that land is rented under secure agreements regulated by the Agricultural Holdings Act 1986, and the remaining half is let under Farm Business Tenancies (FBTs) regulated by the Agricultural Tenancies Act 1995. These FBT agreements are characterised by short lengths of term. The current average length of term on these agreements is 3.66 years, and nearly 85% of all new tenancies are let for 5 years or less.

In response to the announcement by the Chancellor on Inheritance Tax, already we are seeing the advisory industry which surrounds the landlord community step into gear by promoting the need for estates to look at restructuring their position to maximise their ability to avoid tax. With the landlord community being considerably risk-averse, we are anticipating many situations where private landlords will be seeking to bring back into hand land currently let under short-term FBT agreements to provide them with options for wealth management. We could see many FBT agreements being ended and many tenancy agreements that should have been offered being pulled from the market. We have already had a number of conversations with TFA members who are worried about their position.

We are also concerned that landlords may cease or significantly reduce their investment in let holdings, even secure ones, for fear of increasing their value which will then be subsequently assessed for tax on death.