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Farmers and Landowners: Tax Consequences

Volume 825: debated on Monday 28 November 2022


Asked by

To ask His Majesty’s Government what plans they have, if any, to ensure that farmers and landowners do not suffer any disadvantageous tax consequences if they change the use of their land away from agriculture to enter long-term arrangements that (1) deliver improvements in biodiversity, or (2) sequester carbon, under current government schemes.

In begging leave to ask the Question standing in my name on the Order Paper, I declare my interest as a farmer and landowner. I also take this opportunity to humbly apologise to the House for failing to declare these interests during a supplementary question I was scrambling to ask during last week’s Question on the private rented sector.

My Lords, farming is going through the biggest change in a generation. The Government are introducing policies in England that work for farm businesses, food production and the environment. Some stakeholders have raised concerns that tax rules, particularly inheritance tax rules, might be a barrier to land use change in certain situations. The Treasury, HMRC and Defra have been working closely to consider the potential need for changes to the tax system, including where rules may need to be clarified.

I thank the Minister for her kind words; however, we need a little more action. It would seem to be a platitude to say that the tax system should align with the Government’s climate change and environmental objectives but, over a year since the passing of the Environment Act, there is still no legislation looking at how the tax system effects the sequestration of carbon and biodiversity net gain. Can the Minister confirm that these activities will have the same tax status as traditional farming activities, and be considered as trading income rather than investment income? Secondly, can she confirm that these activities will attract the same inheritance tax reliefs currently available? Without such reliefs, higher agricultural land values as a result of carbon sequestration and biodiversity net gain will disincentivise the farmer from joining these schemes.

I am afraid that I cannot give the noble Lord the Answer he desires. I can confirm that HMRC is discussing the issues he has raised with Defra both to clarify how existing law applies, for example, to the production, sale and use of carbon units in different environmental schemes, and to look at the inheritance tax question he raised. The Government have shown that we will act to clarify the tax rules where appropriate for the farming programme. For example, legislation is being introduced to clarify that payments under the lump sum exit scheme for farmers are treated as capital receipts and, therefore, charged to capital gains tax or, for companies, to corporation tax as chargeable gains.

My Lords, I hear what the Minister says but the government paper of October 2021 said that the Government would

“review guidance on the tax treatment of trees and woodlands, to provide greater clarity to landowners on how new and existing trees on their land affect tax liabilities.”

Nothing has been forthcoming. Can the Minister update the House on the progress of the review? She mentioned HMRC but most people do not know what the guidance is.

My Lords, we are iterating our approach as we develop these schemes. Quite a lot of them are new, and many different aspects are being piloted or developed. It is important that, as development happens, we take into account the tax considerations and implications of the new schemes. I can reassure noble Lords that we are aware of some of these questions and issues. We are looking at them very closely and, as the policies are developed, we are taking that into account in the Treasury’s input into Defra schemes.

My Lords, does the Minister guarantee that her taxation policies will not bear down unjustly and negatively on the upland farming areas of England and Wales? I have in mind the Borders, Cumbria, the Pennines, Cefn Gwlad—the heartland landscape of Wales—and the moorland communities of the south-west. Does she acknowledge that, already, besides taxation, the big problems are elevation and climate, and that these historic communities do not need further problems arising from her department’s taxation policy?

I reassure the noble Lord that we are cognisant of the need to ensure that our tax policy and our environmental land management schemes are working with and not against each other. It is an area of some complexity. With respect to how different farmers are affected—the noble Lord mentioned upland farmers—we are trying to look at the whole system and its different levels of complexity to make sure that we get to the right approach.

My Lords, the current environmental land management schemes have three elements: the sustainable farming incentive, which is up and running, and the local nature recovery and landscape strands, which are still in pilot stage and will not be fully launched until 2024. Farming is a profession that requires very long-term planning. How do the Government expect farmers to engage fully with ELMS if they do not know what the impact on them will be, either financially or in expected tax commitments?

Part of what the noble Baroness alighted on reflects our approach: as we pilot and iterate these schemes, we will learn and look at their implications for taxes. How they are designed might have different impacts, so we cannot prejudge that. I reassure noble Lords that tax rules should not have a bearing on many environmental activities under the ELM schemes, such as improving soil health. Many farmers already undertake these activities or have changed their land use within the tax rules currently in place.

My Lords, I listened carefully to the Minister’s responses. There are a lot of doubts among farmers about what ELMS will actually mean, and there is too much uncertainty to allow them to plan properly for the future. Does the Minister properly understand why some parties are just not comfortable about entering into a scheme for which the tax implications are unclear, and which might not even exist in a few years’ time? Farmers need clear advice today, so when will the Government be able to provide that clarity?

As I said, many of the tax rules should not have a bearing on many of the environmental activities under ELMS. We already have several schemes under way, with a high take-up among farmers. But we understand that there could be broader implications, particularly for the landscape recovery scheme, and we are carefully looking at this. The 22 initial projects are receiving funding through that scheme, and people have felt able to sign up to them under the existing tax rules and systems. But we will look at those projects and implications as part of our design.

My Lords, I urge my noble friend to look urgently at this problem, which is very serious for farmers and landowners, who cannot make a decision with any certainty, given that the tax regime might change. What incentive is there for a farmer to do the good thing for biodiversity if they will be taxed badly for it?

As I said, the tax rules should not have a bearing on many environmental activities under the ELM schemes. We are cognisant, particularly where there may be a change of land use, that this could invoke questions of tax treatments—although, even if the land may not be used for agriculture any more, it may often still qualify for business property relief, for example, as an alternative inheritance tax relief.

My Lords, following up the question from the Labour Front Bench, could the Minister indicate the timing? When will the Government be able to clarify these issues in relation to the many parts the Minister referred to?

As I understand it—I am working hard to make sure that I fully understand the tax implications of these schemes, but I am not yet as well versed in these things as my noble friend Lord Benyon—we are still designing the landscape recovery scheme and piloting different approaches. Those schemes are not expected to be rolled out in full until 2024, so that work is ongoing. On other schemes that are already in place, we do not expect the larger-scale schemes for farmers, such as the sustainable farming initiative, to have significant tax implications for farmers.