Proposed inheritance tax reforms could unlock green schemes for tenant farmers
Treasury proposals could remove a significant tax barrier to habitat creation in Great Britain, helping to unlock progress on nature recovery, natural flood management and climate mitigation
By Tom Lancaster
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Treasury proposals could remove a significant tax barrier to habitat creation in Great Britain, helping to unlock progress on nature recovery, natural flood management and climate mitigation, whilst creating opportunities for tenant farmers to take advantage of post-Brexit reforms to farm support, do more for the environment and access new sources of revenue.
New analysis [1] from the Energy and Climate Intelligence Unit and rural property consultancy firm Strutt & Parker has found that UK Treasury proposals [2] to overhaul inheritance tax reliefs could provide a major boost to British nature, sparing farmers from a £120m annual tax penalty.
The Treasury and HMRC are currently proposing to extend Agricultural Property Relief [3] – which grants up to 100% relief from inheritance tax – from purely agricultural land to habitats created through their new environmental land management schemes, designed to boost nature in England as England leaves the EUs Common Agricultural Policy and sets up its own post-Brexit farm support schemes. This is in response to feedback from landowners and farmers that these rules penalised the most nature-friendly farmers, by creating new tax liabilities for habitats like woodlands and wetlands that are needed to meet nature and climate targets [4], as well as government commitments to improve water quality and reduce flood risk.
Using data from the RSPB Conservation Science department, ECIU and Strutt and Parker modelled what the current tax liabilities would be for landowners and farmers if they created the habitats needed to meet UK climate targets, in line with Climate Change Committee (CCC) scenarios [5]. Although many landowners who manage their own farming operations would still qualify for inheritance tax relief through Business Property Relief (BPR), those with tenants would be likely to lose these reliefs due to current HMRC rules [6].
ECIU and Strutt & Parker estimated this tax penalty to be around £120m per year for landowners with tenants, assuming that habitat creation was spread evenly across different tenure types.
Commenting on the analysis, Selaine Saxby MP for North Devon said, “Tenant farmers manage some of our most iconic landscapes and make a vital contribution to our national life. It’s only right that they should be able to do even more to meet our climate and nature goals, whilst continuing to produce much of the food we need. Climate change poses a clear and present danger to food production in the UK, and we need to ensure that policy doesn’t create artificial barriers to tackling it.”
Mark Coulman, National Chair of the Tenants Farmers Association said, “Farmers are living with the impacts of climate change every day, with extreme weather hitting crop yields and last year’s drought making it harder and more expensive to feed our livestock. Tenant farmers want to play their part in tackling climate change, and making sure the tax regime helps not hinders them in doing so is vital.
“Too often our members are blocked from applying for green farming schemes by their landlord, who’s in fear of their tax bill going up. Removing this barrier to tenants participating is one of a series of steps Defra needs to take to make sure that the playing field is level for all farmers.”
Jason Beedell, Rural Research Director at Strutt & Parker said, “Loss of Agricultural Property Relief is one of the reasons most frequently cited by farmers and landowners for not engaging in woodland and other habitat creation schemes. This is particularly the case for landowners with tenants. Equalising the tax treatment of farmland with newly created habitats will ensure that this major barrier is removed.”
Tom Lancaster, land analyst at ECIU said, “Our analysis shows that the cost to the Treasury of removing this barrier to progress on nature recovery and climate change is small compared to the benefits it could unlock, including new sources of revenue for tenant farmers. Without it, they risk effectively excluding the quarter of all farmland that is tenanted from contributing towards the most ambitious climate and nature goals, making already stretching targets significantly harder to reach.”
The consultation on the tax relief proposals closed in June, and feedback will now be considered by officials and ministers. Although the proposed changes may help to remove potential liabilities for landowners of £120m per year, this will only cost the Treasury £3m in the first year, or 0.0003% of all tax income [7] rising to £85m by 2050, with an average annual cost of £44m. This is because only a small proportion of landowners generating that overall tax liability will die in a given year, spreading the cost to the Treasury over a much longer period of time. ECIU and Strutt & Parker estimate that the cumulative cost to the Treasury by 2050 would be £1.2 billion, against landowner liabilities of £3.4 billion if the tax reliefs remain restricted to farmland. In practice, if the tax reliefs do remain unreformed, the greater likelihood is that this habitat creation won’t happen at all on the areas in question.
In England, these reforms would remove one of the barriers to tenants participating in Defra’s new environmental land management schemes, which are being developed to replace area-based farm subsidies. At present, tenants are restricted in the land management options they can choose in these schemes by landlord consent, which is partly based on whether those options pose a risk to the landowner’s eligibility for inheritance tax relief. By reforming APR as proposed, tenants will be more free to choose from a wider range of options, particularly woodland, peatland and wetland options that are often the most effective for nature, improving water quality and flood risk management.
The proposed reforms were recommended by the recent review of tenant farming in England completed by Baroness Rock [8], to which the Government responded at the end of May [9].
Evidence suggests that climate change poses the greatest medium-to-long-term threat to UK food production [10]. The majority of land envisaged to be used for habitat creation to help tackle and adapt to climate change is less productive land, and habitats such as wood pasture can still support livestock farming. The ECIU analysis found that the habitat creation these tax reforms could unlock could potentially absorb around 309,000 tonnes of carbon dioxide equivalent every year, totalling 8.4m tonnes of CO2 equivalent by 2050. This amounts to 793 million miles of CO2 emissions in an average petrol car each year, or over 10% of the total emissions savings needed from habitats like woodland in the governments Carbon Budget Delivery Plan, published earlier this year [11].
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[1] The full analysis is available here https://eciu.net/analysis/repo...
[3] Agricultural Property Relief (APR) provided up to 100% inheritance tax relief on the agricultural value of farmland. To be eligible, land must be “land or pasture that is used to grow crops or to rear animals” https://www.gov.uk/guidance/agricultural-relief-on-inheritance-tax
[4] The Environment Act in England creates legally binding targets on a range of issues, including biodiversity and water quality, that will require significant levels of habitat creation and restoration to meet. The net zero target in the climate change act will similarly require significant levels of land use change to habitats such as woodland, according to the Committee on Climate Change (see note 5)
[5] Climate Change Committee 6th Carbon Budget https://www.theccc.org.uk/publication/sixth-carbon-budget/
[6] Business Property relief (BPR) provides up to 100% relief from inheritance tax for business interests in privately owned businesses and shareholdings in both listed and unlisted companies. BPR will apply to land and assets not used for agricultural purposes provided they are used in the overall farming business, and there is precedent for habitats such as woodland and peatland to qualify. Landlords however cannot qualify for BPR on these habitats if on tenanted land, as they are not likely to have control over the company or land (a requirement of BPR) https://www.gov.uk/business-relief-inheritance-tax
[7] 0.0003% of all public sector receipts is based on total receipts of £1,017bn divided by £3.05m https://commonslibrary.parliament.uk/research-briefings/cbp-8513/#
[9] https://www.gov.uk/government/news/government-sets-out-further-support-for-tenant-farmers
[10] UK Food Security Report, Theme 2, UK Food Supply Sources https://www.gov.uk/government/statistics/united-kingdom-food-security-report-2021/united-kingdom-food-security-report-2021-theme-2-uk-food-supply-sources