Surely the UK Government must see sense on farm tax – Martin Kennedy

This has caused more concern amongst farmers across the UK than I have seen in many years and understandably so. What is also clear is there is still some misunderstanding of why this is such an issue for agriculture.

First of all, the reason Agricultural Property Relief (APR) and Business Property Relief (BPR) was introduced as far back as 1984 and 1976 respectively was to allow the transfer of assets to the next generation without incurring a tax bill that would make it almost impossible to continue in said business without having to sell parts of the asset. For agriculture this is vital, and I will try and explain why as simply as I can and also explain why this budget decision has been taken with the wrong data present.

Margins made in food production by the primary producer are very low, in fact recently this has been exacerbated by some retailers intentionally selling vegetables way below the cost of production as a loss leader. This devalues food, encourages waste and forces prices down to the extent it becomes unviable to grow. This production is done on valuable land that often only receives a return on that investment of around 0.5% - 1%. As a result of this low return many businesses have diversified to top up the agricultural business to keep it afloat.

I can’t think of any other business that has to diversify to augment the income of the core business. Can you imagine a garage business, an electrician business, a hotel chain business or indeed any business you can think of saying “I just cannot make enough money to keep this business afloat, I’m going to have to diversify into farming”? I don’t think so.

No one in this industry complains about paying tax on income, in fact it is very healthy for any industry to be paying income tax as that shows the business is making money. What is wrong is this change is taxing the asset that is trying to generate that income.

So why is this relevant? Well, given the amount of tax that would be involved, a family farm could not make enough money from producing food to pay that tax bill so would end up having to sell off part of the farm which again would be a double whammy in that not only would that make the farm unviable, but you would also be eligible for capital gains tax. It’s little wonder family businesses are so concerned.

So now back to the figures that have been used to influence this flawed treasury decision. First of all, let’s get a grip of the values, yes, farmland is hugely valuable but that value is never realised until point of sale. It’s very difficult to say how big a farm needs to be to make it viable, that’s dependent on the type of land and the type of farming business. However, just for arguments sake we’ll say that a mixed arable and livestock unit supporting a family and one employee on average land probably needs to be around at least 400 acres, many would say that’s not near enough. We’ll put a conservative value of £7,500 per acre, that means the land value alone is £3m. So, if tragically someone dies, the UK government say that provided there is a couple with their name in the business, then with all the relief available there will be no tax to pay. This is where the incorrect data starts, these figures are only counting APR, when all the BPR assets are counted such as buildings, machinery, livestock etc which could add at least another £1.5m, then that would mean a tax bill of around £300,000. As I said earlier with the return on investment being so low, a farm of this type would only have an income of around £50,000 in a good year so paying a tax bill of around £30,000 per year for ten years is not doable and completely disincentivises the next generation to continue. This tax bill would of course be double if the business was only in one person’s name.

The UK government also suggest that only around 500 businesses would be affected, not only is this figure wrong as this was a snap shot of 2021 data where values have now considerably changed, it is also disingenuous to say only 500. Agriculture is a generational industry so over many years this will affect many thousands of businesses. What really sticks in the craw is this proposed tax changes will only generate an estimated £500m per annum, ironically the same amount that’s given overseas in agricultural aid.

Currently the UK government are completely missing the target of the investors who are using land simply to avoid paying tax. However, the unintended consequences are family farms, even relatively small ones who are now under a lot of pressure to hand over the business earlier than expected in the hope people will live for another seven years so the next generation can continue producing food without a serious tax bill millstone round their neck. In many instances it’s extremely difficult to hand over too early as not only may the next generation not be ready but also the older generation cannot then be a part of the business.

There are many other ways to hit the required targets, but that cannot be done without consulting with the industry. Surely they must see sense, I can guarantee the industry will keep up the pressure until this is reviewed.

Martin Kennedy is president of NFU Scotland