Inheritance Tax: Impact on Rural Businesses

Question

11:18:00

Asked by

To ask His Majesty’s Government what assessment they have made of the impact of changes to inheritance tax rules on rural businesses and economic growth.

My Lords, I beg leave to ask the Question standing in my name on the Order Paper and draw attention to my interests as set out in the register.

My Lords, the Government have taken difficult decisions on welfare spending and on tax necessary to repair the public finances and rebuild public services. This includes measures to better target agricultural property relief and business property relief. These measures mean that, despite the difficult fiscal context, we are maintaining significant levels of relief from inheritance tax beyond what is available to others, and that almost three-quarters of estates claiming agricultural property relief and business property relief will not pay more inheritance tax. The independent Office for Budget Responsibility does not expect the reforms to have a significant macroeconomic impact.

I thank the Minister for his Answer, but these changes are already stifling investment. A Farmers Guardian and Tenant Farmers Association joint survey reports that 55% of tenant farmers will invest less in their farms and 25% of tenant farmers expect their landlords to take back land for non-farming purposes and reduce their investment. Furthermore, over half say their mental health is suffering. They fear eviction. I have had many heartbreaking messages from farmers who fear they just cannot go on. Is the solution not to follow the recommendation in the Rock review to allow landlords letting land for eight years or more to be able to include the value of that land as part of the zero-rate threshold for inheritance tax?

I am grateful to the noble Baroness for her question. I fully recognise that she has a great deal of expertise in this area and I pay tribute to the work that she has done, particularly on behalf of tenant farmers. I do not accept the premise of her question. I fully respect the commitment that has gone into the survey that she spoke of but do not necessarily accept its conclusions. Our commitment to tenant farmers remains steadfast, which is why we are investing £5 billion in farming over two years, the largest budget for sustainable food production in our country’s history. I take seriously what the noble Baroness says about mental health. Mental health is of course an issue that the Government take extremely seriously, which is why we are working to improve mental health services across the country, including through plans to recruit an additional 8,500 mental health workers. We fully understand the strength of feeling on this issue, and we urge people to make sure they use the correct data to prevent further inflaming the debate.

My Lords, the nature of farming across the UK varies greatly. For example, in Northern Ireland the size of family farms is smaller but the price of land is a lot higher per acre. Given that that is the case, and given that families in Northern Ireland are concerned about the incoming changes, will the Minister commit to looking at an impact assessment not of the macro situation in the UK but of the different regional variations?

I am grateful to the noble Baroness for her question. As she may know, as is standard practice, we will publish a tax information impact note alongside the draft legislation before the relevant Finance Bill. My honourable friend the Exchequer Secretary has engaged extensively with stakeholders in this area, including with the Ulster Farmers’ Union. We have fully listened to the issues that the noble Baroness raises. However, it is worth saying that individuals will still benefit from 100% relief for the first £1 million of combined business and agricultural assets, and above that amount there will be 50% relief, meaning that inheritance tax will be paid at a reduced effective rate of up to 20%. That is considerably more generous than in any other part of the economy.

My Lords, the problem is not just the damaging inheritance tax changes but delinked payment reductions, as we debated yesterday, sky-high energy bills, a botched trade deal and extreme weather. Defra anticipates that 7% or 8% of farms will not survive, and most people accept that that is on the optimistic end of the scale, and the sale will be to corporates that have no real link with, and put very little into, the local economy. In the analysis that the Minister says is coming, will there be a broader analysis of the state of the rural economy—not just macro-level analysis, and not even regional analysis, but something that genuinely focuses on the rural economy because it needs different solutions?

It is worth saying that the Government are investing £5 billion across this year and next year to support the transition to a more sustainable and productive sector, including the biggest budget for sustainable food production and nature recovery in our history. I do not necessarily accept the characterisation that the noble Baroness seeks to put forward of what is going on and what this Government are doing. As I say, there will be a full impact assessment at the time when the legislation is published, and I am sure it will cover many of the things that the noble Baroness asks about.

My Lords, there is no doubt that there is some sort of mismatch between the assurances being given and the experiences of some of our smaller farmers, who are deeply concerned at what is going on. What consideration have His Majesty’s Government given to having some sort of clawback clause? If assets were disposed of within, say, seven years after a death, that would deal with the problem of the tax loophole whereby some people are using land simply to get out of paying tax.

I am grateful to the right reverend Prelate for his question and I pay tribute to the work that he is doing with the communities that he is discussing. The Government believe that introducing a clawback mechanism such as he describes could still result in some of the wealthiest estates paying less inheritance tax than under the proposed reforms. That would raise considerably less money, and therefore would not go towards repairing the public finances and supporting the public services in the way that we seek.

My Lords, I own a farmhouse in Devon, which, like Northern Ireland, has very small farms. My house is worth over £1 million as a farmhouse, and all the farmhouses around me, with small farms of 100 or 150 acres, are worth at least £1 million. Does the Minister appreciate that? You are at the £1 million situation even before you look at the cost of the land.

I am grateful to the noble and learned Baroness for her question. As I say, individuals will benefit from 100% relief for the first £1 million of combined business and agricultural assets, but that £1 million sits on top of the existing reliefs and all other spousal exemptions and nil-rate bands. Full exemptions for transfers between spouses and civil partners will continue to apply; therefore a couple with agricultural or business assets can typically pass on up to £3 million-worth of assets without paying any inheritance tax at all. That is considerably more generous than in any other part of the tax system.

My Lords, did my noble friend notice that, when the farmers blocked Whitehall with their tractors—sparkling, new, expensive tractors—they did not look very poor? Has he noticed that, when the Tories talk about tax, they always want to make the rich even richer?

Oh!

They do. Will my noble friend confirm that, when poor people get tax deductions, they spend money on food and other essentials, and that helps growth?

It is incredibly important that the decisions we take make the tax system fairer and more sustainable, and I believe that is absolutely what we are doing. Despite a very tough fiscal context, we are maintaining considerably more generous reliefs in this sector than exist anywhere else in the tax system.

The Government claim that family farms are safe from the changes to IHT. However, they have set the threshold too low, as subsequent examination has clearly demonstrated. It was also chilling to see the CBI’s economic analysis, which showed a net fiscal loss from the changes to business property relief of £1.26 billion over five years, with the tax revenue of £1.4 billion trumped by the loss of tax on production, spending, income and NICs. Has the dismay across the countryside at this mistaken policy been reflected in the responses to the very narrow HMRC consultation of 27 February? Will the Government think again before the changes take place next April?

No. The analysis undertaken by CBI Economics is not robust nor representative. It is based on a self-selecting survey from members of groups campaigning against these reforms. The independent Office for Budget Responsibility certified the costing at the Budget in October. The reforms to agricultural property relief and business property relief are forecast to raise a combined £520 million in 2029-30. If the noble Baroness would like to tell me where she would get the £520 million that she would like to remove, I would be very interested to hear it.