Farmers’ Complaints About Inheritance Tax

The Economic Framework: Land, Labour, Capital, and Enterprise

To understand the situation, we need to step back and look at the economics of farming. At its core, most university-level economic theory divides production into four factors: land, capital, labour, and enterprise. The returns on these factors are:

• Land produces rent.

• Capital (like farming equipment) generates interest.

• Labour generates wages.

• Enterprise generates profit.

These four factors are supposed to come together in a liberal capitalist society, where capital is used to produce goods and services for the benefit of society through a market system.

A Hypothetical Farm: Breaking Down the Numbers

Let’s take a hypothetical farm to see how this works in practice. Suppose the farm has land worth £3 million. Under the new inheritance tax laws, this would trigger an inheritance tax bill when the land is passed on after the farmer's death. I’ve chosen £3 million deliberately because it’s enough to make the tax relevant.

The land should ideally generate a return — say, 5% of its value. This would give us a £150,000 annual return from the land. Now, let’s add in the farm’s capital, such as farming equipment, worth £1 million. This equipment, which is part of the farm's valuation and therefore subject to inheritance tax, should generate a return too. To replace this equipment over its 5-year lifespan, the farm would need to generate £200,000 per year just to cover depreciation.

Now, let’s consider the farmer. Farmers work long, hard hours — often 365 days a year. They’re entitled to more than the median wage for this level of effort, so let’s assume they earn £50,000 annually. But the farmer isn’t just a worker; they’re also an entrepreneur, coordinating land, capital, and labour. As an entrepreneur, they should also receive a return in the form of profit. Let’s assume that profit is £50,000 per year.

So, in theory, the farm should generate £450,000 per year to cover the following:

• £150,000 for the land.

• £200,000 for equipment depreciation.

• £50,000 for labour and profit.

The Reality: Farming Returns Are Far Lower

In practice, the reality for many farmers is very different. In fact, many farmers report that they’re not making any return at all on their land. Let’s take them at face value and assume that the £150,000 return on land simply isn’t there. If that’s the case, the farm might only be generating enough to cover the £200,000 equipment depreciation — and even then, it might not be enough.

If the farmer isn’t making enough to cover their wage, their income might drop to £40,000 or less. So, instead of the £100,000 they should be earning (£50,000 for labour and £50,000 for profit), they might be left with just £240,000 — but £200,000 of that would be tied up in covering the cost of the equipment. That leaves them with very little.

The Root Cause: Low Prices, Not Inheritance Tax

So, why are farmers complaining about inheritance tax when it’s clear that the problem lies elsewhere? The issue isn’t the inheritance tax itself, but the fact that farmers are not earning enough from their land to cover their costs and make a decent return. The real issue is that the prices they’re paid for their products are too low.

There are several reasons for this:

1. Brexit: Subsidies have been reduced, adding pressure to already thin margins.

2. Food Manufacturers: Large food manufacturers squeeze prices down, taking a big chunk of the profits from the products they buy from farmers.

3. Supermarkets: Supermarkets drive competition by selling food at the lowest possible prices, further reducing the money farmers receive for their products.

Farmers are being squeezed from all sides, and the result is that they’re not getting paid enough for their produce. The government should be stepping in to ensure that farmers are protected from the monopsonistic power of food manufacturers and supermarkets. Farmers need to be paid more to survive and thrive.

The Rising Value of Farmland

Another issue that exacerbates the problem is the rising value of farmland. Land that’s worth £3 million today might seem like a good asset, but it’s been increasingly used as a financial tool, not as an input for farming. Farmland is bought and sold at inflated prices, largely driven by investors who are using it as a way to avoid inheritance tax.

This speculation in farmland prices makes it harder for farmers to make a return. Ironically, inheritance tax could actually help solve this problem by reducing the speculative value of land. If farmland were taxed, it would stop being a financial asset and return to being a productive farming asset, and the price would likely fall to more sustainable levels.

If inheritance tax were applied to farmland, the price of land would likely drop, making it more affordable for new farmers. This would encourage younger generations to enter farming, which is desperately needed in the industry, as the average age of farmers continues to rise.

At present, many farms are handed down from one generation to the next. There’s no reason farming should be purely an inherited business. New farmers, even those without a family farming background, should be able to acquire farmland and build a future in agriculture.

The inheritance tax charge might be difficult to accept at first, but it could help new farmers enter the industry, which would ultimately be good for farming as a whole. It could help bring much-needed innovation and sustainability to the sector.

Why Farmers Should Welcome Inheritance Tax

As I've outlined, the current model used to analyse farmers' returns reveals serious flaws in the economics of farming. There isn’t a real return being made on the land; it generates no economic value as a farming asset but still holds value — not as an input to production, but as a financial instrument. This shift in how land is valued has created an unsustainable situation for farmers.

Farmers need to reassess their economic arguments. If they want to pass on their farms without an inheritance tax charge, the value of land must fall, which could be a positive development. If farmland has no true productive value, then its inflated price, driven by financial motives, should not be allowed to continue. A reduction in land prices would also open up opportunities for new entrants to the farming market, something the industry desperately needs as the average age of farmers continues to rise.

In conclusion, while farmers are right to be concerned about the state of their industry, their anger towards inheritance tax is misplaced. The real issue isn’t the tax; it’s that many farmers aren’t earning enough from their land to make a sustainable living. Farmers need to shift their focus and demand action against the monopsonistic forces that drive down the price of their products. They also need to recognise that inheritance tax, far from penalising them, could actually help by lowering the inflated value of land, making it more accessible to new farmers.

I’m genuinely on the side of farmers. I want farming to thrive, but the sector cannot succeed when it’s been so financialised. Ultimately, we need a government that will protect farmers from unfair market forces, ensuring that they receive a fair price for their produce and creating a sustainable future for farming. In this context, inheritance tax could play a crucial role in revitalising the sector. Instead of fighting it, farmers should welcome the tax, as it will help reclaim farming as a genuine industry and not a financial asset. This would benefit not only farmers but also society as a whole by supporting food security and sustainable farming practices