The streets of London were crawling with tractors recently, protesting the changes to inheritance tax on farms. (Previously farms were exempt from inheritance tax; now farms worth over £1m will be subject to it.)
My initial response was to buy the line that this would only affect a tiny minority of farms, and that it was shutting a pretty egregious tax loophole exploited by the likes of James Dyson and Jeremy Clarkson.
It has felt impossible to find a nuanced view because of the strength of feeling on both sides. But in this article Dan Davies thoughtfully explains the economics of it, and why my gut feeling was actually wrong:
“In the thirty or so years since Agricultural Land Relief was brought into the tax code, the price per acre of farmland has gone up roughly fourfold, and according to credible numbers I’ve seen, there are plenty of farms which, considered as businesses, are earning a return on assets of less than 1% (£35,000 of annual profit on a farm valued at £3m is apparently pretty good going).
“In that sort of situation, you have to value the tax shield separately – what the yeopersons of Olde Englande actually own might be a farm worth about £700,000, with a mortgage on it, and a £2.3m tax asset. So if the tax position changes, the value of the farm should be expected to plummet, and they go from being asset-rich—cash-poor to just poor.
“And this matters a lot… The asset value of a family farm, although it’s for the most part not realised or consumable wealth, is potentially a big part of the contingency reserve of that family against uncertainty. If things get really bad, either in a business context or some other family emergency, you can borrow against the value of the land or, in extremis, sell off a few acres.
“There’s a lot of uncertainty in farming! If the backstop of being able to sell bits of tax-advantaged assets isn’t there, then rather than being gradually eroded over four or five generations (which seemed like the natural outlook for the small farm sector), you’re likely to see lots of them wiped out suddenly in the next drought or foot & mouth disease outbreak.”