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The Labour party has ruled out scrapping inheritance tax relief for farmland if it wins the next general election, in a move welcomed by landowners but that would limit its future tax-raising options.
Shadow environment secretary Steve Reed said on Thursday that he would not axe agricultural property relief (APR), a tax loophole that allows landowners to pass down their farms to their children tax free, should a Labour government come to power.
Speaking at the Country Land and Business Association (CLA) conference, Reed was asked whether Labour intended to get rid of the tax break. He replied, “we don’t”, adding, “we have no intention of changing APR”.
Victoria Vyvyan, president of the CLA, which represents landowners and rural businesses, approved of the decision, saying that scrapping APR would accelerate the consolidation of farms. “In a single swipe that would take small farms out,” she said.
Rachel Reeves, shadow chancellor, had announced in 2021 that she would review “every single tax break” in the UK to make the system of business taxation “fairer”.
In September, The Times reported that the shadow treasury team had drawn up £4bn of potential tax increases by ending crucial loopholes, of which the largest would be ending relief on inheritance tax for farmers.
In the tax year 2020 to 2021 the value of APR was £1.02bn claimed across 1,300 estates, according to official figures.
Other options considered by Labour included ending “business relief for inheritance tax” or either scrapping or cutting “business asset disposal relief”, which lets big shareholders sell their stakes in companies and pay a lower tax rate on profits.
But a Labour official said on Thursday that although the party keeps all reliefs “under review” it had no plans to change any of those three tax loopholes.
Reeves has already ruled out new wealth taxes and said that she would not bring in a mansion tax, increase capital gains tax or raise the top rate of income tax. Instead the party has only announced a handful of limited tax rises, including on private schools, private equity chiefs and non-domiciled UK residents.
By ruling out certain tax rises Labour could make it harder for itself to fund improvements in public services against a tight fiscal backdrop if it wins the general election expected next year.
The number of farming businesses has been declining sharply for decades as more productive farms swallow up smaller businesses that struggle to break even in the low-margin sector.
“The return on capital in farming is very low . . . and the return would not be enough to pay inheritance tax charges. It would effectively wipe out your profits,” said Michael Parker, head of tax at the National Farmers Union.
Farming organisations had warned that removing APR would above all endanger more vulnerable tenant farmers, who manage approximately a third of English farmland.
One of the objectives of APR is to increase the amount of tenanted farmland. With access to inheritance tax relief, landowners are more likely to hold on to their land and rent it out then sell it on when times are tough.
“If there was no relief, there would be less incentive for tenants, and it would be bad for the wider sector,” said Andrew Shirley, head of rural research at Knight Frank.
Land values have reached record highs, rising 8 per cent in the three months to October to £8,951 as a result of heightened interest and tight supply.
Critics of APR argue the tax loophole has driven up land values, as rich investors buy farmland in order to sidestep inheritance tax, creating more competition for farmland.
Private and institutional investors bought a third of all farms sold in 2022, according to land agents Strutt & Parker.
