How to preserve the family farm
How to preserve the family farm
Tax breaks can harm those they purport to help
Before the budget I wrote this in The House magazine, and you can listen to Nick Robinson, Stephanie Flanders and I discussing it afterwards on the Radio 4 Podcast here.
This blog has a rule - no commentary, only new policy ideas. Today, however, I will break that rule. One policy idea I have not yet written appeared in the Budget, and it has gone down badly. I want to set out why it is a good idea, and why the government should go further.
Until now someone who owned a farm could pass it on to their heirs free of inheritance tax. The government changed that in the Budget, with inheritance tax now payable at half rate for farms worth more than £1m. Apparently this is the end of the family farm. In fact this change helps family farms.
Farmers are old, more likely to be over 65 than under 55. Those inheriting a family farm often have to wait until their father dies.1 That makes no sense - you could easily inherit at sixty, which is not the time to take control of a business. It is almost as bad as waiting to be King.
Under the new rules, farms escape inheritance tax as long as the owner lives seven years after giving it away, so giving it away at 65 makes great financial sense. That is good for the concept of the family farm. A person works on the farm for 20 years, inherits aged 40, runs it for 25 years, and then passes it on, while being around to help, give advice etc. That is how a family farm should work - and we now have a big financial incentive to make that happen.
The old rules were also bad for family farms because the tax break meant that very rich people bought land to avoid inheritance tax. There was literally no better way to leave £100m to your kids.
This harmed family farms, because, as any economist would predict, it raised the price of farmland. As Elizabeth Elder, a Northumberland farmer and Farmers Weekly writer, notes “prices have been artificially inflated by non-agricultural buyers purchasing for inheritance tax purposes, making it very difficult for active farmers to compete.” Spot on. More expensive farms make it hard for young farmers to set up as a family farm. How is Kaleb, from Clarkson’s Farm, going to afford a farm of his own? Maybe his media fees will give him the leg up he needs, but without that he is stuffed.
What the government has done, therefore, is right and will help family farms.
They should have gone further. As Dan Neidle notes, most farms inherited are under the new cap and unaffected. 73% of farms are worth less than £1m, and another 20% are probably exempt - because a couple gets a double allowance, and there is a separate allowance for the farmhouse. Most farmers still won’t have an incentive to leave their farm to their kids before they die.
Furthermore, the remaining inheritance tax benefit is still substantial. Elizabeth Elder and Kaleb Cooper will still be competing with people who buy land just for the tax break. That is bad news.
The best policy would be:
Exempt any farmer who dies before they are eligible for their state pension from inheritance tax. They could (and should) buy life insurance to cover the risk, but society can afford to take that risk on the chin. The exemption would apply only to those who farm the land they own. It is for family farms, not landowners.
Standard inheritance tax for those over the state pension age. Together these two rules protect family farms, and ensure that people inherit at a sensible age. Those wishing to keep the farm for longer can, either by paying inheritance tax, or purchasing life insurance to cover the tax
The Country Land and Business Association is up in arms. For them, the change is bad news. And of course they will claim that this is the end of the family farms. In those immortal words, “They would say that, wouldn’t they?” But they are wrong, and we should take no notice of some of the richest and most tax-privileged people in the land. The Budget tax changes are good news for family farms, and the government should go further next year.
The overwhelming majority of farmers are men.