Whilst there has been much talk about the impact of the family farm inheritance tax, the effect on one key farming sector has been overlooked.
Tenant farmers across the country could be faced with 'unintended consequences' that the government did not consider with its so-called 'family farm tax'.
This is according to Martin Hall, director at Davidson & Robertson and president of the Central Association of Agricultural Valuers (CAAV).
He says there are likely to be considerable concerns for tenant farmers in England and Scotland who may be faced with a tax bill and no financial means to pay it.
And due to differences in Scottish and English law, he warns that these implications have not been fully considered or understood by the government.
In Scotland, under the Agricultural Holdings (Scotland) Act 1991, the tenancy does not die with the tenant.
It can be passed on for generations and there is also a financial value to vacate the tenancy, perhaps 20-30% of the farm value.
Tenancy value has been tested in case law (Baird and Walton 1992), but with current agricultural tax exemptions, there would be no tax to pay, Mr Hall notes.
From April 2026, as part of plans announced in the autumn budget, tenancy value will be considered as part of the tax liability if above the £1m threshold.
For a farm worth £5m, that tenancy value may equate to £1.25m. Looking at smaller lowland family farms of around 300 acres, the £1m threshold could be reached before the working capital for livestock, machinery and other assets are included.
Whilst owner occupiers have the opportunity to release capital from land assets, that is not the case for tenant farmers, Mr Hall explains.
They have no means to sell land, profits are too low to pay for this financial liability, and banks will not lend based on tenanted acreage.
There are around 4,000 Scottish tenancies that could potentially be affected, according to his estimates.
Following a meeting with Scotland’s Tenant Farming Advisory Forum (TFAF), Jeremy Moody, secretary of CAAV, sent a letter to the Treasury office highlighting this issue.
In England and Wales, around 30% of agricultural land is under tenancy agreements, and while the tenancy cannot be sold it still has a financial value that the HMRC will take into account.
Mr Hall says one solution could be to raise the threshold to a realistic level, such as £10m, as this would cater for most family farms and take the tenancies out of the equation.
“There are other unintended consequences for tenant farmers to consider," he explains.
"Ambitious and entrepreneurial tenants looking to develop their farm or diversify will be adding value to the farm which would bring an increased tax burden in the future.”
Commenting further, Mr Hall says it is important that the industry pushes the government to recognise and address the tenant tax trap in their IHT plans.
And it is equally incumbent on the agricultural industry to initiate discussions with family and advisors around succession and retirement plans.
“In terms of valuations, we will see much more demand as farmers start planning for the longer term and for succession," Mr Hall says.
"And it is likely that these valuations will be under much more scrutiny by HMRC as there will be potential tax income to the treasury.”
