How inheritance tax is changing the face of rural Britain

Wealthy investors are hoovering up agricultural land in order to avoid inheritance tax, pushing prices to record highs, and forcing out farmers.

The average value of arable land in England has surged 15pc year-on-year to a record high of £10,800 per acre, according to a recent report from estate agents Strutt & Parker.

James Uys, a 50-year-old farmer from Gloucestershire, is currently in the process of selling his one hundred acre estate so he can buy a larger plot elsewhere. He hopes to make £3m from the sale.

Mr Uys said land prices are soaring because of increased competition from private investors, which has made it far harder in recent years for farmers to purchase rural plots big enough for commercial farming.

“Professional farmers are getting priced out by people buying land because they want the IHT relief,” he said.

A third of all farms sold last year were bought by private and institutional investors – the highest level for over a decade.

Wealthy investors have long purchased farmland in order to sidestep death duties, as agricultural land can be passed on free from inheritance tax. The relief saved landowners £1.1bn in IHT between 2017 and 2020, according to official figures.

The Telegraph and 50 Conservative MPs are campaigning to abolish inheritance tax.  

Matthew Sudlow of Strutt & Parker said: “There have always been tax-driven buyers in the market – often with an estate worth between £2m and £5m.”

Chris Etherington of tax firm RSM said usually the buyer in question has some background in farming. 

“Acquiring a farm isn’t something to be ventured into lightly and it’s rare that farmland will be purchased purely for the potential tax benefits. 

“Often the individuals have experience in agriculture or it’s something they have a passion for but their wealth and the tax benefits can influence the scale of their farming operations.”

Recently a lot of new interest in farmland has come from environmentally focused buyers, including so-called “natural capital” investors and funds. 

However, estate agents Knight Frank noted in a recent report that these players “are far from dominating the market and, more often than not, are being outbid by more traditional tax-driven, farmer or amenity buyers.”

Rampant inflation is another factor driving more private investors into the market. Agricultural land is usually regarded as a safe haven asset during times of economic turbulence.

Mr Uys plans to use the proceeds from his farm sale to buy another, larger plot further north. 

“I need a bigger challenge,” he said. Being in his position – selling up land, and holding over the capital gain tax relief – is effectively the only way a farmer can afford to buy land now, experts said, due to surging prices and poor return-on-investment from the land.

James Stacey (pictured), a 42-year-old farmer from Essex, said the gap between income and land prices means it is now almost impossible for a traditional farm to purchase land based solely on farming income.

“Based on average land values where we are located – of between £10,000-£12,000 per acre – the return on investment is less than 1pc before tax on profits (if any) and borrowing costs.”

The dramatic rise in prices, he added, has made it difficult for farmers to expand their acreage, except by renting or entering a contract farm agreement. 

“Most farmers I know are already landowners of some kind, and have accepted that the prospects of expansion in terms of owning additional land is low.”

It is not just demand from private investors that is driving up land prices, but also farmers’ reluctance to put their land on the market. Supply is at one of its lowest levels in decades, with just 20 farms publicly marketed in the first quarter of 2023, according to Strutt & Parker.

“For farmers who stay in it, the land is a massive asset which is why it’s not being sold,” said Mr Uys.

Mr Sudlow said political uncertainty and Covid-19 has also encouraged farmers to sit tight in recent years, limiting supply and driving up prices.