Farming and Inheritance Tax
Alistair Carmichael Excerpts(2 weeks, 5 days ago)
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James Murray
I would like to make a bit of progress to explain some of the detail behind our policy, which may answer some of the questions that hon. Members are jumping to their feet to ask.
We know that inheritance tax is always an emotive issue, and understandably so. It is a natural desire for people to want to pass on their assets to the people they love when they pass away.
The standard single rate of inheritance tax has been 40% since 1988, and assets have generally long been entitled to nil-rate bands, reliefs and exemptions. A form of relief for agricultural property was introduced on estate duty in the Finance Act 1948, meaning that this duty was charged at 55% of the rate that would normally have applied. A new agricultural property relief and a business property relief were created in the mid-1970s with the introduction of the capital transfer tax. The rate of relief increased over time to a maximum of 50% relief; that maximum rate was then increased to 100% in 1992. This means that agricultural landowners and farmers did not receive 100% relief for almost all of the 20th century, and yet farms passed down between the generations.
Mr Alistair Carmichael (Orkney and Shetland) (LD)
I am grateful to the Minister for giving way. That was why the law was changed to introduce 100% relief. Family farms were not being passed down because the value of land was increasing. Will he consider that before bringing in these changes?
James Murray
I thank my hon. Friend very much for her intervention. It is telling that when she makes such an important and sensible point, the Opposition do not want to hear it and try to shout her down. As she rightly points out, our changes to the reliefs will make buying land less attractive as a means of inheritance tax planning. This means that land prices are likely to become more affordable for farmers, thanks to a reduction in tax-motivated investment in agricultural land.
James Murray
I have given way already, so I am going to make some progress.
The reforms should be seen in the context of the significant existing support for the farming industry in the wider tax system, including the exemption from business rates for agricultural land and buildings, the ongoing entitlement for vehicles and machinery used in agriculture to use rebated diesel and biofuels, and the exemption from the plastic packaging tax for the plastic film used to produce silage bales. On top of that, farmers are able to add together their profits from farming over two to five years and be taxable on the average of those profits, building flexibility into their tax arrangements for difficult years and unexpected challenges.
Mr Alistair Carmichael (Orkney and Shetland) (LD)
I remind the House of my entry in the Register of Members’ Financial Interests.
It is a pleasure to follow the hon. Member for Peterborough (Andrew Pakes), who is a fellow member of the Select Committee, and the hon. Member for Ribble Valley (Maya Ellis). They both, in their own way, made an important contribution to the debate by giving a bit more context to it. I will vote for the motion in the name of the Leader of the Opposition, not because it is the most elegant piece of drafting that I have seen in 23 years in the House, but because there is nothing in it with which I really disagree. It does feel, though, like a bit of a missed opportunity to move the debate onwards. I say that not as any real criticism, because it is a response to a Government measure in the Budget, which was also a bit of a missed opportunity.
It is worth taking a minute or two to pause and reflect on how things might have been done differently. We could have gone through the process that multiple Governments and Departments have gone through over the years by starting with a Green Paper or a White Paper, and looking at the way in which inheritance tax has worked, and some of the unintended consequences that it has generated. We have all heard of the super-rich buying up land and inflating the price as some sort of tax avoidance measure. I have not met a single working farmer who wants to defend that, so there was a real opportunity to do things differently. We could have built a consensus about the proper value of land, and about some stuff that is not really being spoken about in this debate.
I speak as a former solicitor. Thankfully, I never did any executory practice, but some of those who are still in practice and with whom I am in contact tell me candidly that, because there was 100% relief on agricultural land, they did not really give a great deal of thought to the valuation that went into the application for confirmation. That is bound to have had an impact on the figures on which the Government rely. Had we done things in a proper and reflective way, we would have been able to build consensus on values and thresholds, for example, and do things very differently.
Sir John Hayes
I welcome the contribution of my former ministerial colleague. Had the tax been levied on exactly the people he describes—the super-rich, and non-working farmers—few would have complained, but it has been set at the wrong level. That is why I asked for detailed modelling to be made available to the House.
Mr Carmichael
I think I just said more or less exactly that. A debate of the sort that I am talking about would have allowed for a wider debate about farming finances. We have had 70 years of very direct Government intervention in the agricultural economy through farm subsidies. Taking a step back, critical though those farm subsidies are, their net effect has ultimately been to keep farmers poor. There is now such an enormous mismatch between the capital value of the assets being farmed and the derisory return on them. DEFRA tells us that there is a 0.5% return on capital. Farmers in my constituency tell me that a £3 million farm will give them an income of about £25,000 a year. That is pretty much in line with DEFRA’s figures.
We hear about farmers working into their 80s. It is a slightly patronising and very romantic view of doughty farmers working on into their 80s because they are seized with a sense of vocation. There absolutely is a sense of vocation among farmers, but let us not forget that a lot of them work into their 70s and 80s because they have been running businesses that have had no spare money to put into a pension so that they can look after themselves in their old age.
Alicia Kearns
The right hon. Gentleman makes an important point about just how little farmers earn, and yet they are consistently being described by Labour Members as asset-rich. Should farmers not fall into their definition of working people, and therefore Labour should be on their side rather than what they are doing to them?
Mr Carmichael
“Working people” hardly does justice to farmers. Some of my young constituents told me they were working for returns of about £6 an hour. There is a reason I chose not to become a farmer at 16 and why I thought law was a more attractive career opportunity to pursue, but I bow to no one in my admiration for those who make that choice.
Of course, there is the question of those who have made their estate planning decisions on the basis of APR being available. Others have pointed to that, but it is absolutely critical, and it goes beyond estate planning. I wonder how many farmers over the years decided in a divorce settlement to take the farm as their part of the capital, because they have a familial and emotional connection to the land, and are now finding that what looked like an equitable settlement a few years ago risks being much more inequitable.
The particular opportunity I fear we have missed is that in relation to tenant farmers. The Tenant Farmers Association came up with an excellent proposal, which would reward landlords who grant leases in excess of 10 years with exemption from inheritance tax liability. That would be good for the very people who everybody on both sides of the House says they want to help: the small family farmers. There are multiple reasons why people might buy up agricultural land. I do not know anybody who takes an agricultural tenancy thinking that it will make them a member of the super-rich as a result.
The idea that is being mooted of a clawback—something on which we could see a bit of a sensible discussion and a consensus between the Front Benches—or the idea of a suspended inheritance tax liability which would crystallise only at the point of the land sale after the death of the owner, would both work to keep land in active food production. The irony of the way in which the Government have structured the measure is that, by allowing a 50% relief on farmland above £1 million, the purchase of agricultural land will probably remain an attractive proposition for the super-rich.
We have reached a point in the debate where we need to broaden it out beyond just inheritance tax, and look at the wider question of farming finance and ask ourselves how we can build a consensus that puts farming and food production at the heart of the countryside, where it truly belongs.
Madam Deputy Speaker (Ms Nusrat Ghani)
Now, with a speaking limit of five minutes, I call Matt Bishop.
Business Property Relief and Agricultural Property Relief
Alistair Carmichael Excerpts(2 months ago)
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Mr Alistair Carmichael (Orkney and Shetland) (LD)
It is a pleasure to serve with you in the Chair, Dr Huq, and I congratulate the hon. Member for Gordon and Buchan (Harriet Cross) on securing a very timely debate. She has provided us with what is definitely my favourite euphemism, the “succession event”, and I think we know what that means in most cases.
This is a timely debate because we have had a lot of speculation in the media in recent weeks about the possibility of changes coming in the Budget very soon. There is very little that is certain in politics these days, but I am as near certain as anybody can be that, when the Minister comes to reply, he will say that he is not going to tell us anything about the Budget. I understand the reasons for that, which are essentially sound, long-standing and respected by all, but it illustrates the inadequacy of this as a way of effecting meaningful change. Without the ability to have a proper debate involving the Treasury, change will inevitably come in a haphazard and chaotic way, and it will bring with it many unintended consequences that will have an effect on not just farmers but the wider rural community. I should have said right at the start that I have my own interests in agriculture, which are in the Register of Members’ Financial Interests, and I remind the House of those.
There may be a case for reform, but this really is not the way to go about it. The hon. Member for Gordon and Buchan was right to say that farming is a capital-rich and revenue-poor industry. Of course, any changes in farming will have consequences that spread beyond agricultural businesses. What affects farmers will affect vets, agricultural merchants, local shops and post offices in some of the most economically fragile communities to be found anywhere in the country. My concern has long been—it is not exclusive to this Government—that the Treasury does not quite understand the way the rural economy works. It is a cliché, but true, to say that farming underpins just about everything in rural communities and the rural economy, whether environmentally—through the way in which land is managed, which has consequences for nature—or financially.
The Tenant Farmers Association provided a briefing for this debate, which said that it is already seeing consequences among its members:
“We are already seeing, first hand, concerns about how Inheritance Tax charges change the way that traditional estates have thought about the management of their agricultural land, and that is before there is any change to the Inheritance Tax regime. Rural estates with significant residential and mineral interests will want to ensure that they have sufficient business activity elsewhere on their estates to be able to qualify for BPR from Inheritance Tax across the whole of their estates. If APR was abolished this will make things hugely much more difficult for farm tenants.”
That important point gets right to the heart of the matter. That is why I am pleased that the hon. Lady, in framing this debate, covered APR and BPR, which work in an interlinked way. It also shows the responsibility we in politics have when we set hares running.
North of the border, for the last few years we have had an active and often welcome debate about land reform, but one of the consequences of that debate is that many agricultural land owners, instead of moving out and putting in tenants, have moved into grass lets. A lot of the larger landowners’ estates, in particular, have replaced the secure agricultural tenancies for which they had been known for generations with a much less secure system of tenure.
As the TFA says, there might be a case for reform. It suggests ways to reward longer tenancies of 10-plus years and more secure tenancies. We have to have that debate, but we cannot effect that in a meaningful way that looks at agricultural spending in the round once the decision has been announced in a Budget. There are many other influences at play. For example, in recent years we have had the reform of agricultural support payments in England and Wales, and that is now coming through in Scotland.
For decades, farmers have been told that they have to diversify—diversify, diversify, diversify—so they have renovated farm cottages and turned them into furnished holiday lets, and now they are being told that they are responsible for the housing crisis in the country and are being hit with furnished holiday let reform, which this Government appear to have inherited from the previous one.
Inheritance tax can be avoided by intra vires transfers, but the way they work can often be arbitrary. They can also have some difficult personal consequences when it comes to the transfer from one generation to the other, as the family interaction can be difficult.
I congratulate the hon. Member for Gordon and Buchan. I hope that when the Chancellor delivers the Budget next week, if this issue is under the Treasury’s active consideration, we will see the Government’s direction of travel and the overall picture that they want to achieve, rather than just one quick hit, because that could have serious consequences for family farms and rural communities across the country.
The Exchequer Secretary to the Treasury (James Murray)
It is a pleasure to serve under you in the Chair, Dr Huq. Let me join others in congratulating the hon. Member for Gordon and Buchan (Harriet Cross) on securing the debate. I thank all hon. Members for their contributions —including the advice from the shadow Minister, the hon. Member for Droitwich and Evesham (Nigel Huddleston), on what to expect in my new role from the hon. Member for Strangford (Jim Shannon).
As many Members have rightly highlighted, there has been a great deal of speculation in recent weeks about potential changes to taxation in the Budget, including to the reliefs that we are debating today. Hon Members will understand—indeed, many of them acknowledged in their speeches that they understand—that I cannot add to that speculation. The Budget is on 30 October, and my right hon. Friend the Chancellor of the Exchequer will set out any changes to the tax system then, in the normal way. However, ahead of that, I welcome this opportunity to hear Members’ views on this matter.
Let me start by briefly setting out the context for this Budget. Following the spending audit in July, the Chancellor has been clear that difficult decisions lie ahead on spending, welfare and taxation to address the £22 billion black hole that we inherited from the previous Government. Decisions on how to address that will be taken at the Budget in the round. It is crucial that we get the public finances back on a firm footing so that we can restore economic stability. On those foundations, we will boost investment, increase growth across the UK and improve public services. That is the prize ahead and how we will make people across Britain better off.
Let me turn to how inheritance tax operates in the UK tax system. Inheritance tax, as other Members have said, is a wealth transfer tax and applies to the estate of the deceased. Transfers made in the seven years before death are also taken into account. The estates of all individuals benefit from a £325,000 nil-rate band. The residence nil-rate band is a further £175,000 and is available to those passing on a qualifying residence on death to their direct descendants, such as children or grandchildren. That means that, altogether, qualifying estates can pass on up to £500,000. Furthermore, the qualifying estate of a surviving spouse or civil partner can pass on up to £1 million without an inheritance tax liability, because any unused nil-rate band or residence nil-rate band is transferable to the surviving spouse or civil partner.
Above those thresholds, the headline rate of inheritance tax is 40%, but it is important to remember that that rate is charged only on the part of the estate that is above the threshold, and after the application of reliefs. That is obviously the subject of today’s debate, so let me turn first to business property relief. That relief is a long-standing part of the inheritance tax system. It is designed to ensure that businesses need not be broken up or sold on the death of an owner in order to pay an inheritance tax liability. That reflects concerns that there may not always be enough liquid assets in the business to pay the tax. Subject to certain qualifying conditions, the relief generally applies to unquoted shares and interests in a business. It also applies to shares designated as “not listed” on a “recognised stock exchange”, such as shares that are quoted on AIM, as mentioned by the shadow Minister. The rate of business property relief is usually 100%, but can be 50% in some circumstances. Until March 1992, the maximum rate of the relief was 50% and there was a lower rate of 30% alongside that. Hon. Members may be interested to know that the cost of the relief has risen from £685 million in 2019-20 to a forecast £1.3 billion in 2023-24.
Agricultural property relief is also a long-standing part of the system. It has a similar purpose to business property relief, although the main benefit is to ensure that relief is available when land is let to tenant farmers, as we heard from various hon. Members today. This is largely because owner-occupiers of agricultural land also qualify for business property relief. Again, the rate of agricultural property relief is usually 100%, but can be 50% in some circumstances, and as with business property relief, lower rates existed before 1992. The cost of this relief has risen from £320 million in 2019-20 to a forecast £365 million in 2023-24.
There are many different views on these reliefs. Stakeholders, including Family Business UK and the Country Land and Business Association, have argued strongly against any prospect of the reliefs being abolished. Other organisations are in favour of changes to the reliefs, with the Institute for Fiscal Studies suggesting that a cap on such reliefs could allow those passing on small farms or businesses to be taken out of inheritance tax, while preventing agricultural and business investments from being used to avoid it. The right hon. Member for Orkney and Shetland (Mr Carmichael), whom I thank for his contribution, said that there may be a case for certain reforms to agricultural property relief. Of course, the previous Government had views on these reliefs. I understand from reports in the Telegraph that the previous Government considered abolishing these reliefs as part of reforms to the system.
I welcome the opportunity today to hear from Members on their views, particularly on agricultural property relief, but also on issues relating to farmers and their constituents more widely. The hon. Member for Chester South and Eddisbury (Aphra Brandreth) rightly highlighted the importance of food security for this Government and its importance in our policy making. The hon. Member for Strangford (Jim Shannon)—in nudging me gently, to quote the shadow Minister—spoke eloquently about the importance of farming in his constituency and in the economy of Northern Ireland. The hon. Member for Central Suffolk and North Ipswich (Patrick Spencer) spoke of some of the wider challenges facing the farming community in recent years, not least energy bills. My hon. Friend the Member for Hexham (Joe Morris) is proving to be a very effective constituency MP already, raising a number of important issues on behalf of those he represents, as well as drawing attention to the wider significance of having economic stability and security for farmers and everyone in his constituency.
Mr Carmichael
The Minister reminds us—it is our fault for doing this—that we have focused very much on the family farm as the unit of concern, because that is what concerns most of our constituents. However, a lot of agricultural land is, in fact, owned by bodies such as the Royal Society for the Protection of Birds, of which I am a member. The RSPB is never going to have a succession event, to join the hon. Member for Gordon and Buchan (Harriet Cross) in using that expression. The consequence of abolition could be that two farms right next door to each other—one owned by a charity or an institution of that sort, and the other owned by a family—would be left having to farm in very different economic circumstances. Is that really fair?
James Murray
I thank the right hon. Gentleman for his point, although he presupposes he knows what will happen to agricultural property relief, which, as I set out earlier, I cannot comment on further. He will have to wait a couple of weeks, perhaps, to have further conversations about what the Government will do in this space. I thank him and all hon. Members for their comments today, because it has been an interesting debate. As we have heard, the issue generates some strong views among many of our constituents and the Members present, who represent them.
I understand that there are many different views on what the Government should do, and the debate has allowed me to hear them. As always, the Government welcome all opinions and keep all taxes under review. However, I return to my earlier point: the Chancellor will, of course, announce changes to the tax system at the Budget. There is not long to wait.