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To say that the farming community across the UK has had a challenging time in recent years, would be an understatement. Everything from Brexit to the increasing cost of operating expenses like fertiliser and fuel, to reforms made by Labour to Inheritance Tax, have all massively impacted farmers. The result has been that around 20% of all farms in the UK have ceased to exist over the last decade. I believe that three reforms could begin to address some of the problems that farmers have faced and these could also help us to move towards a more sustainable method of farming.
Farmers: a marginalised group
Farmers have long been forgotten about in British political discourse and are feeling increasingly isolated. The biggest negative impact on the welfare of farmers in the last decade has been Brexit.
Brexit has dealt a harsh blow to British farming, with agricultural exports to the EU dropping by an average of 38% since the UK voted to leave in 2016. In addition, farmers are battling severe labour shortages, increased red tape, and a phase-out of the EU’s Basic Payment Scheme in favour of the UK government’s Environmental Land Management Scheme. The three impacts of Brexit on farming, can be summarised as follows:
- Export Slump: According to data from HMRC and the National Farmers’ Union (NFU), sales of British farm products to the EU have plummeted across the board. Poultry exports dropped by 38%, beef by 24%, dairy by 16% and lamb by 14%. Total volumes of food and farm exports remain roughly one-fifth lower when compared to pre-Brexit levels.
- Labour Shortages: Restrictions on freedom of movement have crippled seasonal agricultural workforces, leaving produce to rot in fields and forcing some farmers to cut back production. According to DEFRA, UK fruit and vegetable production has dropped by 17.9% since 2016, with wheat down by 16.9% and oilseed rape halving.
- Subsidies and Policy Shift: Farmers formerly benefited from the EU’s Common Agricultural Policy (CAP). This is being replaced in England by the Environmental Land Management scheme (ELMS), which compensates farmers for public goods like tree planting and river protection instead of food production. This has left many farms struggling with cash flow as they adapt to these changes.
Necessary changes as farms move on from CAP dependency
Farmers are stewards of the landscape, being responsible for the management of two thirds of the land in the UK. This role comes with responsibilities towards wildlife, the environment and our ecosystem, which should be recognised. As with any business, adjustments to benefit the environment will be more readily carried out if they are financially supported. If the driving force behind the change comes from the farmers who tend the land every day, not wealthy absent landowners, who may be one step removed, the likelihood of success is increased.
Despite some merits to CAP, one of the main arguments against it, is that it favoured large, intensive operations over smaller family type farms simply because the payments increased incrementally, in proportion to the size of the holding, so that 80% of funding for the basic payment scheme went to only 20% of the producers.
My proposal to change this would be for a flat rate basic income payment, conditional on the size of farms (20 hectares maximum) and predicated on best practice of environmental, welfare and sustainability methods.
The flat rate Basic Income would be paid at £500 per month to each farm and would be capped at a maximum of four farm workers per farm. This would be conditional on the size of the farm, which is the reverse of the way CAP operated. Instead of large farms getting incrementally more and more, in proportion to acreage, the basic income would only be paid to small farms of less than 20 hectares. There could also be sanctions and a reduction of subsidy for farms not adopting best practice in environmental, welfare and sustainability methods.
The Basic Income would replace the Basic Payment Scheme (BPS) and would work in tandem with both the Environmental Land Management Scheme and The Rural Development Scheme, to provide grants to improve environmental measures. In addition, capital grants for infrastructure would help sustain the long-term viability farms.
Annual reviews by a single assessor would be mandatory to ensure that farms are meeting the conditions of the Basic Income by adopting best agricultural practise. Only accredited agencies such as UKAS, Foundation Scheme and other environmental schemes e.g. Red Tractor, LEAF Marque, Organic etc., would be considered suitable to conduct such a yearly review. As farms gradually improve their environmental standards, animal welfare methods and long-term sustainability techniques, the flat rate Basic Income would be gradually phased out as it would no longer be required.
Helping with the cost of operational expenses
Operating a farm is expensive because annual operations must be funded before profits can be realised and yields can be uncertain. This requires high initial financial investment. In the UK, total annual business costs, known as intermediate consumption, exceed £21.6 billion nationally every year. The largest individual operating expenses are livestock feed, fertilisers, farm maintenance, and machinery fuel. These day-to-day items remain deductible from business taxes in the form of full expensing, a capital allowance scheme. However, this doesn’t go far enough to relieve farms of the ever-increasing problem of uncertain operational costs. I believe that three changes could remedy this problem.
- Business relief for small farms: There are 40,000 small farms (below 20 hectares) in the UK, amounting to approximately 50% of the total. It would be sensible for any government to offer business relief to small farms to facilitate increased long-term growth. One option would be to raise the VAT threshold from the current rate of £85,000 to £150,000 for such businesses with an exemption in their first two years of operation.
- Fuel relief: fuel prices increases (especially in light of the recent US-Iran war) have had a massive impact on farms. Electricity, heating, and machinery diesel make up a significant chunk of a farm’s total gross inputs (roughly, 20%). To mitigate this, the government could decouple electricity prices from the wholesale price of gas, thus shifting away from a “marginal pricing” system. In addition, instead of letting the most expensive power source (usually gas) set the price for all electricity, the price could be tied to cheaper, more sustainable renewable forms of energy such as solar, wind and hydro.
- An alternative solution to artificial fertiliser: in the UK, agricultural fertiliser averages between £380 and £500 per tonne, depending on the nutrient type. The price has risen significantly in recent years with increased volatility in the global market. This might be countered by switching to bio-fertilisers such as compost and organic digestate. Using alternative methods could offer some protection from the rising cost of artificial imports.
Despite the bio-fertiliser market being small and nascent in the UK, a report recently published by The National Preparedness Commission stated that this alternative approach to fertiliser use could massively increase, depending on changes to land used and choice of crops, which could allow bio-fertiliser use to overtake imported artificial fertiliser in the long term.
A fair solution to inheritance tax on small farms
Until Labour’s recent reforms of inheritance tax (IHT), an estate paid 40% on assets over the £325k ‘nil rate band’ (NRB). A married couple automatically share their nil rate bands, so only marital assets over £650k would be taxed. In addition, transfers to spouses are usually completely exempt from inheritance tax: so, for most married couples, there’s only inheritance tax when the second spouse dies.
The Labour government recently changed these rules as follows: a combined cap of £1M per person is to be applied to agricultural property relief and business relief. Below that cap, there is still a complete exemption from inheritance tax (except for AIM shares). Above the cap, relief is cut to 50%, so the marginal IHT rate on qualifying farm/business assets beyond the cap becomes 20%, not 40%. This sits on top of the standard IHT Inheritance: the £325k nil-rate band (NRB), the £175k residence nil-rate band where a home passes to direct descendants, and the usual spouse exemption. These changes applied from April 2026 and are expected to raise £500 million per year by 2029/30 (more in earlier years).
There has been huge controversy over the inheritance tax changes in last year’s budget. They raised £500m, but hit some small farms unfairly, while doing nothing to tackle existing inheritance tax avoidance.
I believe there are alternatives and one was proposed by Dan Neidle of Tax Policy Associates. His proposal seems to do the impossible: protect small farms, counter tax avoidance more effectively, and double the tax yield to £1bn.
“Minimum share rule”: The idea is that to get agricultural property relief or business relief, a minimum share of an estate must be made up of qualifying farm/business assets. If this is what you do, you hold more than the minimum share and get relief up to a generous allowance. If you’re simply a wealthy household that bought some farmland/woodland to save inheritance tax, you don’t.
This is further explained below as follows:
A minimum share set at 50%. If the value of the farm/business is at or over the minimum share, APR/BR provide a complete exemption up to a £5m combined APR/BR allowance. This is per-person, so a married couple should benefit from a combined £10m allowance. The allowance should transfer between spouses, in the same way as the nil rate band and residence nil rate bands currently do. Above the £5m per-person allowance, there would be 50% APR/BR relief, i.e. a 20% effective inheritance tax rate. If the value of the farm/business is below the minimum share, APR/BR is not available, so the full 40% IHT rate applies. There would then be a £10m (per person) upper limit to any APR/BR relief. After that, inheritance tax would apply at the usual 40% rate.
I hope I have been able to outline policies in relation to agricultural and rural affairs, specifically farming, which remedy some of the problems faced recently by farmers, most notably on issues relating to the consequences of Brexit, operational costs, and inheritance tax changes.
Farming is a vital, financially uncertain and often misunderstood activity with an output that contributes directly to the economic health of the nation. Politicians should be cognisant of the fact that insensitive and poorly researched policy changes can have negative effects that will impact on the wider economy, not just the farmers and families who are directly affected.
Kayed Al-Haddad is spokesperson for The Liberal Party for Economics, Fiscal Policy and Monetary Policy.
