NFU ‘proves’ 75% inheritance tax hit with help of Treasury and OBR veterans

The NFU has released new research backing up its prediction that 75% of commercial farms will be above the £1m threshold to pay inheritance tax.

Enlisting former Treasury and Office for Budget Responsibility economists, the NFU found the government’s initial calculations that the NFU says means only 27% of farms would be affected by the new inheritance tax for farm businesses was far lower than the reality.

The government has stood by its calculations all week, despite major protests from farmers in Westminster, as Defra secretary Steve Reed repeated reassurances that “the figures that we’re using are not pure guesses”.

A frustrated Reed added at an FDF Investment Summit that “we checked the figures” and most farmers would not be affected.

“They came from HMRC,” he explained. “It was the Treasury that checked them, but we also asked the Independent Office for Budget Responsibility to check them, and they verified them. The Independent Institute for Fiscal studies, the financial think tank, has also checked them and they verified them and yesterday I saw BBC Verify check them.

“How many more checks do you need to be able to say there are robust figures and that is what the decision is based on?” he asked.

Read more: ‘We’ll have nothing left’: Emotional reactions from Westminster farmers’ protest

The NFU has said the latest research showed that the evidence the government is basing its policy on – HMRC data and Agricultural Property Relief claims from 2021-22 – is flawed, with a fundamental difference between what constitutes a working farm and the number of APR claims.

It also said that land prices had grown rapidly since 2021, bringing more farms in scope for the measure. Around 40% of those claiming APR also claim Business Property Relief, so bringing claims under both reliefs within the same threshold is more restrictive than the APR data alone implies.

The government has said it has factored in those claiming APR, including those where there is BPR. 

The NFU said that once landowner claims on blocks of bare farmland and non-commercial farms were removed from the evidence base used by the government, historical claim values were adjusted to reflect current market conditions and the combined impact of claiming BPR and APR was considered, the proportion of farms affected by the tax increased significantly.

When considering an optimistic £2m threshold before the tax takes effect, many medium-sized farms would find that inheritance tax bills spread over 10 years would wipe out most of their returns. Many large farms would see their returns reduce by half.

At the £1m threshold, which will be the case for some, the tax bill would significantly exceed the average returns of a medium-sized farm and absorb most of a large farm’s earnings. 

The government has said it is not possible to infer an inheritance tax liability from the amount of land multiplied by an average land price. There are many factors that go into this including the level of debt attached to the farm, how much of the farm’s size isrented in and not owned, what the land price is, and whether, as for many farms, ownership is split across multiple family members. 

Read more: Defra secretary Reed vows no inheritance tax u-turn in testy Efra Committee hearing

On a sector basis, the latest NFU analysis has found that the tax charge resulting from a £1m threshold would wipe out returns for an average cereals farm and around half of returns for average dairy farmers.

Considering typical historic returns on an average cereals farm and factoring in the reduction in direct payments, a farm making a profit of £34k would be hit with 10 annual IHT instalments of £53k, over 1.5 times its profits. Even at a £2m threshold, the annual tax payments of £33k would equal farm profits.

It also revealed that the majority of estates protected by the £1m threshold are too small to be viable working forms and are likely to include a high proportion of landowners letting blocks of bare farmland, rather than farmers.

Meanwhile, the majority of medium-sized working farms will not be protected by the 10-year payment window because the resulting payments would still be unmanageably large relative to the economic returns they earn, the NFU said.

“Our commitment to our farmers is steadfast – we have committed £5 billion to the farming budget over two years, including more money than ever for sustainable food production, and we are developing a 25-year farming roadmap, focusing on how to make the sector more profitable in the decades to come,” said a government spokesperson. 

“We have been clear since this change was announced that around 500 claims of Agricultural and Business Property Relief each year will be impacted – this is based off actual claims data – and even when inheritance tax does kick in, it is effectively at half the rate paid by others,” the spokesperson added. “It is not possible to accurately infer inheritance tax liability from farm net worth figures as there are different circumstances affecting each farm, such as who owns it, the nature of ownership, how many people own it and how affairs are planned.”