In this second post I will demonstrate how inheritance tax can affect a tenant farmer by referring to a real life example from my past life. I will also illustrate how pressure on landlords may increase a more commercial attitude to rent to the detriment of diversity of farming type, land management and the small family tenant farmer. I will explain terms to a level that those outside of the industry understand.
Farmers can become very tunnel focused on the current issues raised by the reduction in Inheritance Tax Relief that they may overlook that the relief on business assets. Indeed I consider that perhaps it illustrates a lack of understanding of the current government in 2024 that they do not understand the winners and losers and bland comments about “protecting” family farms are at best mistaken and at worst an ideological grab on wealth. Even small tenant farmers with no freehold land can be affected.
About 10 years ago I visited a tenanted dairy farm in the middle of England to help a colleague that was struggling with the working capital facilities that this farm had. I had known the client for some time, albeit through talking on the telephone over the previous decade and recognized the difficulty from both their and the Bank’s point of view, so I asked a senior colleague to accompany me as a second opinion.
The farm was a small lowland dairy farm of about 240 acres held on an Agricultural Holdings Act tenancy that included the farmer’s house and home and a dairy unit housed in mostly 19th century farm buildings. The nature of this tenancy is that the farmer enjoyed succession rights in that, subject to suitability, he could pass down the succession rights to up to a further two generations. These tenancies are becoming less common and the type of Tenancy and its rights were established in 1948 to protect Tenant farmers and set out rules of compensation and rights. In part, this was prompted by the vast fire sale of landed estates as they suffered inheritance tax bills rising from 60% to 80%. In some cases large and historic country houses were burned to the ground to reduce the estate value in desperate measures that even saw wealthy landowners move into their own stables to live. In this case the landlord charged a below market rate because he recognized that quality dairy farming at this scale produces milk that is sold close to, and at times below, cost and he wished to have a diversity of farm types and land management on his estate. I have seen this applied in different ways by many large landed estates as they wish to have a certain type of tenancy, occupant or specific land management usually for sound ecological reasons. I suspect that such arrangements will be under review by some estates and am aware of some conversations that have occurred only in the last week. This identifies the first area of concern that is, if Inheritance Tax will be a draw on future cash and reserves will need to be built up for it to be affordable. Albeit this is not a primary concern in this instance as I wish to focus on small family farms.
This dairy farm consisted of 140 high quality pedigree cows. As such it was tiny, the average dairy herd at that time was about 280, I understand it is now around 350. The farmers were in their 60’s and they had family that could succeed in the business. However, they also had borrowing in six figures. As a tenant farmer they had no land as security and all banks prefer to borrow at the customer’s risk rather than their own. It is possible for a tenant farmer to give an Agricultural Charge on their farm, that is a charge over all their machinery that is not encumbered by finance, livestock and growing crops. Nowadays such a charge is almost never used and on the odd occasion that they are they require renewal every two years to be deemed of any security value from a lenders risk management perspective. Effectively as an unsecured borrower with no land as security this farmer would experience ongoing increases in interest rates well in double figures in a time when base rate was around 0.5%. With milk income against costs low day to day cash flow from milk did not cover expenses and a living. This farm was operating slightly above capacity for its size (in very simple terms a cow per acre is slightly above stocking density for high quality high yielding animals). However knowing this customer I was highly confident in supporting their borrowing and will explain why as this is highly significant to understanding small family farms, their value, and their value to UK food security.
Initially we sat down with the farmer and drank coffee. One of the joys of visiting a dairy farmer is full milk coffee, a treat my colleague was unable to enjoy as he had his black. We discussed our concerns and listened to their concerns, plans and wishes including their physical abilities as they got older and succession. I got them to explain their awards and prizes at shows and the value of their livestock. After coffee we went into their cow shed and there on the wall was rosette after rosette and certificates for awards. The quality of the livestock was unquestionable and demonstrated that my confidence in them was well placed. The simple fact is that they could sell a few individual animals and clear their bank facilities. However, as we discussed with them at the time, their farm was subject to a potential Inheritance Tax trap as my enquiries with the Inland Revenue at that time informed me[1] there was no relief on a livestock, although plant and machinery can attract business relief, and we estimated their livestock to be worth in excess of £2.5million pounds.
They had not considered this future liability and in practice it would mean that any succession would be with a much reduced herd. Now here is an important factor. Quality blood lines of dairy cows and other high quality livestock are often in the hands of small family farms. Once this is lost it cannot be easily regained and future choices of food security and land management risk being reduced. The value of this tenant farmer’s stock demonstrates that if the farmer owned the farm the land and buildings would be worth over £3 million and the machinery they operated had a net value of £180k. This demonstrates that the existing regime before the budget did not protect all aspects of family farms and this is actually potentially worse going forward.
[1] Note I am no tax expert and only speak from past experience. My experience of Inheritance Tax is that the quality of advice and what can be achieved upon death varies greatly upon the ability of advisors. This will be described briefly in my 3rd post on this subject.
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