Small Farms and Family Businesses

Lord Livermore Excerpts

Thursday 12th December 2024 Lords Chamber

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, I begin by thanking the noble Earl, Lord Leicester, for securing today’s debate and congratulate him on his opening speech. I also pay tribute to the noble Baroness, Lady Cumberlege, following her valedictory speech. Throughout her many years in this House the noble Baroness has been an important and influential voice, on the issue of healthcare in particular. I wish her well for the future.

I have listened closely to the words of all noble Lords throughout this debate, and I of course acknowledge the strength of feeling expressed today. I pay tribute to the huge contribution that our farmers make, not only to our economy and to our food security but to our way of life. The Government are deeply committed to supporting them and our rural communities. As the right reverend Prelate the Bishop of Norwich observed, I know that many in the sector are anxious about what the changes announced in the Budget mean for them. In the time I have available, I shall set out some facts and seek to provide some reassurance about the impact of the measures we are introducing.

Let me first, though, remind your Lordships’ House about the economic context in which the Budget decisions were taken. As noble Lords will know, the Government faced an incredibly challenging fiscal position, with a need to both repair the public finances and rebuild our public services. We believe that economic stability is the foundation of economic growth and that stability in the public finances is a core part of that, so ignoring or postponing difficult decisions was simply not an option.

Many noble Lords have spoken in today’s debate about the fragile state of the rural economy, and they are of course right. Problems including poor public transport, a lack of affordable housing and poor digital connectivity have plagued rural communities for years. That is why fixing the foundations of our economy for the long term is so important, so we can invest in the public services and the infrastructure that will benefit the whole of our country.

Among the many difficult decisions that we had to take in the Budget, much of this debate has focused on the reforms that we are making to agricultural property relief and business property relief. I recognise that inheritance tax is an emotive issue. It is an understandable and natural desire for people to want to pass on the assets they worked hard for to the people they love when they die, and the Government recognise the role that these reliefs play in supporting farms and small businesses. Importantly, they will continue to play that role, but the reality is that the full, unlimited exemption, introduced in 1992, has become unsustainable.

The main issue is one of fairness. Under the current system, the 100% relief on business and agricultural assets is heavily skewed towards the wealthiest landowners and business owners. According to the latest data from HMRC, 40% of agricultural property relief is claimed by just 7% of estates making claims. That is just 117 estates claiming £219 million of relief.

It is a similar picture for business property relief. More than 50% of business property relief is claimed by just 4% of estates making claims, which equates to 158 estates claiming £558 million in tax relief. It is neither fair nor sustainable to maintain such a large tax break for such a small number of claimants, given the wider pressures on the public finances.

A secondary issue relates to the purchase of farmland. The reality today is that buying agricultural land is now one of the most well-known ways to shield wealth from inheritance tax. This has artificially inflated the price of farmland, locking younger farmers out of the market. Clearly, this was not the objective of this 100% relief when it was first introduced in 1992.

For the reasons that I have set out, the Government are changing how we target agricultural property relief and business property relief from April 2026. We are doing so in a way that maintains significant tax relief for estates, including farms and businesses, while supporting the public finances in a fair way.

Many different numbers were used in today’s debate, so let me set out some of the facts. Under the new system, individuals will still benefit from 100% relief for the first £1 million of combined business and agricultural assets. Above this amount, there will be 50% relief. That means that inheritance tax will be paid at a reduced effective rate of up to 20%, rather than the standard 40%.

Up to 520 estates claiming agricultural property relief, including those that also claim business property relief, are expected to be affected as a result of these changes in 2026-27. Therefore, nearly three-quarters of estates making claims in that period will not pay any more tax as a result of this change in the year it is introduced. Similarly, around three-quarters of estates claiming business property relief alone in 2026-27 will not pay any more inheritance tax either.

Indeed, all estates making claims for these reliefs will continue to receive generous support, at a cost of £1.1 billion to the Exchequer in the first year. The reliefs also sit on top of all the other spousal exemption and nil-rate bands. Therefore, a couple with agricultural or business assets will typically be able to pass on up to £3 million-worth of assets without paying any inheritance tax.

The noble Earl, Lord Leicester, and the noble Lord, Lord Curry of Kirkharle, spoke about the longer-term projections for this tax change. However, forecasts for the impact of these changes over a long period are unreliable, as estates will make changes to the way they plan their tax affairs in order to reduce their liabilities. For example, they may change ownership structures or plan for their succession differently.

After these reforms are implemented, the system will remain more generous than it was before 1992, when inheritance tax was applied at a maximum rate of 50%, including on the first £1 million. As the Institute for Fiscal Studies has said, our reforms will leave farmland

“much more lightly taxed than most other assets”.

Importantly, however, people can also access existing features of the inheritance tax system. Full exemptions for transfers between spouses and civil partners will continue to apply, meaning that any agricultural and business assets left to a spouse or civil partner will be completely tax free.

Any inheritance tax liability on relevant assets can be paid in 10 annual instalments in most circumstances and will be interest free. These payment terms are more generous than in any other part of the tax system. If owners pass on their businesses seven or more years before their death, no inheritance tax will be due. Taper relief will also apply within that time. The noble Lord, Lord Northbrook, asked about taking an income in these circumstances; there are several ways in which this would still be possible.

The changes will not be introduced until April 2026, giving farmers time to plan and assess their liabilities. As the changes are implemented, we expect estates to reduce their tax liabilities. For example, individuals may change ownership structures or plan for their succession differently. The costings by the independent Office for Budget Responsibility take full account of this and assume that it will occur.

At this point, I would like to directly address some of the misinformation that has surrounded this issue. Much of this has focused on the data used to determine how many estates will be affected, mentioned by the noble Baronesses, Lady Shephard of Northwold and Lady Foster, and the noble Lords, Lord Curry of Kirkharle, Lord Bilimoria, Lord Rogan, Lord Northbrook, Lord de Clifford and Lord Douglas-Miller. I encourage all noble Lords who have not yet seen it to review the letter that the Chancellor sent to the Treasury Select Committee in the other place setting out the facts in this regard, copies of which are available in the Library.

It is important that we avoid causing unnecessary concern to farmers and farming communities. The data the Government use is based on HMRC’s inheritance tax claims data—that is to say, the actual claims made by estates for agricultural and business property relief. This is the most robust data there is and is endorsed by the independent Office for Budget Responsibility.

Some noble Lords have referred to data published regularly by Defra, data from the Northern Ireland Executive and from other organisations and have used this to claim that the number of estates affected will actually be far higher. However, this data relates to the total value of farms across the country. It is impossible to accurately calculate inheritance tax liability from this data because owning assets over the exemption threshold does not necessarily mean you will pay inheritance tax on those assets. This is because such data does not account for key factors such as who owns the farm or the nature of that ownership, how many people own the farm and how they plan their affairs. It also assumes no succession planning over the coming years.

The noble Lords, Lord Taylor of Holbeach and Lord de Clifford, the right reverend Prelate the Bishop of Newcastle and the noble Baroness, Lady McIntosh of Pickering, asked about assessments made of this tax change. The Government set out their modelling at the Budget and more recently the Chancellor provided further details to the Treasury Select Committee, including in her follow-up letter. As is standard practice, we will publish a tax information and impact note in the usual way alongside the draft legislation next year.

My noble friend Lady Mallalieu and the noble Lord, Lord Douglas-Miller, asked what steps the Government have taken to consult on these measures. Alongside routine engagement, the Government received Budget representations from the National Farmers’ Union, the Country Land and Business Association and the Tenant Farmers Association which covered this specific issue. We will continue to work closely with key stakeholders in the industry as we implement this change.

My noble friend Lady Mallalieu, the right reverend Prelate the Bishop of Norwich, the noble Baronesses, Lady Foster and Lady Bennett of Manor Castle, and the noble Lord, Lord Douglas-Miller, also raised concerns around mental health among farmers and in rural communities. 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. Defra also works through its farming and countryside programme with a range of farming charities, including the Royal Agricultural Benevolent Institution and the Yellow Wellies charity, which have highlighted mental health challenges for farming communities.

The right reverend Prelate the Bishop of Norwich, the noble Earl, Lord Devon, and the noble Baroness, Lady Bakewell of Hardington Mandeville, asked if the Government will consider dispensation for farmers above a certain age. The Government remain committed to the changes as set out in the Budget, but clearly individual circumstances will vary. Therefore, any individual who is concerned about their specific tax liability should consult an accountant or financial adviser.

The right reverend Prelate the Bishop of Newcastle, the noble Lords, Lord Curry of Kirkharle, Lord Londesborough and Lord de Clifford, the noble Viscount, Lord Trenchard, and the noble Baroness, Lady Foster, asked about the level of the threshold. The Government’s position remains that our approach gets the balance right between supporting farms and fixing the public finances in a fair way.

Many noble Lords raised the issue of wider support to farmers and rural communities. The changes we are introducing should of course be seen in this wider context. The Budget committed £5 billion to farming over the next two years, including being the biggest Budget for sustainable food production in our history. It also committed £60 million to help farmers affected by the unprecedented wet weather last winter, and we are protecting farms and rural businesses by committing £2.4 billion over the next two years to rebuild crumbling flood defences.

We will also continue to provide existing support for the farming industry in the wider tax system. This includes, for example, the exemption from business rates for agricultural land and buildings, and the ongoing entitlement for vehicles and machinery used in agriculture to use rebated diesel and biofuels.

Many noble Lords, including the noble Baronesses, Lady Miller of Chilthorne Domer, Lady Cumberlege and Lady Foster, and the noble Lords, Lord Rogan, Lord Cameron of Dillington and Lord Taylor of Holbeach, spoke about food security. That is an issue we approach with the utmost seriousness. It is why we have committed £5 billion to the farming sector over this year and next to support long-term food security. As the United Kingdom Food Security Report 2024 published yesterday showed, our food security has been resilient in the face of a number of shocks over the last three years.

The Government recognise that a small minority of estates will be affected by these changes, but reform of these reliefs is necessary given the fiscal challenge that confronts us. We must put our economy back on to a stable footing and repair our broken public services. That includes the schools, hospitals and roads which communities across the country, including those in rural areas, rely on every day. We have taken this decision in a way which makes the tax system fairer and more sustainable, and it is set against the backdrop of significant new investment for farming as well as support for small businesses. Again, I thank all noble Lords who have spoken today, and in particular the noble Earl, Lord Leicester, for securing this debate.