Spring budget 2023: a quiet budget for farmers?
While none of the terms ‘agriculture’, ‘farming’ or even ‘rural’ made it into Jeremy Hunt’s budget speech yesterday, there are a couple of points relevant to farmers and landowners worth highlighting that are included in the budget report itself.
Firstly, the budget report states that the government “is publishing a call for evidence and consultation to explore both the taxation of ecosystem service markets and the potential expansion of agricultural property relief (APR) from inheritance tax (IHT) to cover certain types of environmental land management”. This call for evidence is most welcome - APR clearly needs to be updated to reflect that farmers are being asked to play an increasingly important role in the UK’s environmental commitments. It is also somewhat overdue considering that the government’s roll out of Environmental Land Management Schemes (ELMS) to replace the basic payment scheme (BPS) is already underway with BPS payments to be phased out entirely by the end of 2027.
One would hope the consultation could be quickly followed by legislation to confirm that land being used to produce environmental benefits would qualify for IHT reliefs. There is currently widespread uncertainty as to whether APR could apply to land subject to ELMS (particularly the new Countryside Stewardship and Landscape Recovery Schemes) or offering other eco-system services (the consultation refers to schemes whereby farmers produce and sell carbon / biodiversity units), which is inhibiting growth and investment in this area. As Baroness Rock commented in her review of the agricultural tenanted sector (the Rock Review), published in October last year, the current tax rules are perceived by many to act as a barrier to changing land use as many landlords are cautious about giving consent to environmental scheme participation due to fears about losing tax relief. While in some cases, a claim for business property relief (BPR) could be made as an alternative to APR, this will not be available in all circumstances.
While not mentioned in the budget report itself, the government is also using the call for evidence as an opportunity to explore a recommendation in the Rock Review to restrict the application of 100% APR to land subject to a Farm Business Tenancy of more than eight years, or an old-style Agricultural Holdings Act (AHA) tenancy. The thinking is that this would encourage longer tenancies which would provide tenants with the time and security to implement environmental schemes. This is almost a complete reversal of the current position, wherein 100% relief is available on let farms where vacant possession can be obtained within 24 months. While the aim of this Rock Review recommendation is laudable – to enable tenant farmers to participate in delivering longer term environmental benefits – it will be crucial that legitimate reasons for shorter tenancies are recognised and that such tenancies continue to benefit from APR to avoid the unintended consequence of landlords simply taking short-term tenanted land back in hand. We intend to respond to the consultation and anticipate that commenting on legitimate reasons for shorter tenancies will be a key aspect of our response. The recommendation would be a significant change if implemented and would undoubtedly cause landowners and tenant farmers to review their inheritance tax position.
Separately, the budget report also included an announcement that from 6 April 2024, the scope of APR and woodlands relief will be restricted to agricultural property in the United Kingdom. At present, the relief also extends to land in the Channel Islands, Isle of Man or European Economic Area; for individuals with agricultural property or woodlands in these areas, thought should be given as to whether interests could be structured to secure BPR instead. There are currently no indications that the geographical scope of BPR will be likewise restricted. This restriction of APR is an unsurprising consequence of Brexit and seems intended to encourage investment in UK land rather than overseas. If it is to achieve its green agenda, the government would do well to confirm the availability of IHT reliefs for UK land delivering environmental services to incentivise investment in this area.