Richard Broadbent, director in the environmental team at national law firm Freeths

The Chinese philosopher Lao Tsu said, “A great nation is like a great man: When he makes a mistake, he realises it. Having realised it, he admits it. Having admitted it, he corrects it. He considers those who point out his faults as his most benevolent teachers”. Of course, doing that takes a huge amount of humility, a virtue which is rare in men and rarer still in nations (or Governments). Increasingly, however, it is looking like the Government’s announcement to change the Inheritance Tax (IHT) rules for farmers in the Autumn Budget was a mistake. We will see whether the Government realises that mistake, admits it and corrects it.

This article considers why the Government’s decision on IHT may have negative unintended consequences which could undermine its wider efforts to promote nature recovery.

Nature Recovery and Farming

Just over 80 percent of the UK population lives in towns or cities making us a predominantly urban people. However, the built environment (including all residential and non-residential buildings and structures) takes up less than 10% of the total landmass. Rather the vast majority of the landscape is used for farming, as it has been since the Bronze Age. Today, just under 70% of England and just over 70% of the UK is used for farming.

Quite rightly, this Government like the previous Government, is committed to landscape nature recovery to reverse the biodiversity declines we have witnessed in this country since the Industrial Revolution. Doing this will require important decisions to be made about land use at a landscape scale. Self-evidently, therefore, there is no hope of doing that unless the farming sector is on board – a point worth repeating as often as possible until it is firmly understood. For this reason, agricultural policy and nature conservation policy are inextricably intertwined.

Progress at on nature recovery at risk

To this end a host of schemes have been put in place to encourage more sustainable practices in the farming sector. Key to this is the Environmental Land Management (ELM) scheme, the agricultural subsidies which replace the EU's Common Agricultural Policy (CAP) and rewards farmers and land managers for providing environmental and climate benefits alongside food production. Environment Minister Daniel Zeichner said in September that “This Government is fully committed to ELM schemes, including the Sustainable Farming Incentive (SFI) and will not be redesigning the schemes from scratch”. One flagship element of ELM are the Landscape Recovery Schemes which encourage clusters of farmers and landowners to work together at a landscape scale to lock up land for nature conservation for at least 20 years.

To its credit, in recent years the farming sector has embraced a move towards more sustainable farming practices, with many incorporating more sustainable regenerative farming techniques into their day-to-day management of their land. That has happened as a result of Government incentives as well as skyrocketing fertiliser and energy costs as a result of global instability. The introduction of new regimes such as Mandatory Biodiversity Net Gain also creates opportunities for famers as it imposes a new regulatory pressure on house builders to fund biodiversity, stimulating private sector investment into the creation of biodiversity units and creating a new income stream for farmers. Introduced in February 2024, the market for off-site biodiversity units is set to mature in 2025 and now forms a central component of the emerging market for natural capital goods.

2025, therefore, should have been a year in which farmers continue the trend towards nature recovery initiatives at a landscape scale, something which nature in the UK badly needs.

The Government’s proposed changes to IHT rules in the Autumn Budget, however, have cast a shadow of uncertainty over many family farms, impacting their ability to make long term decisions about the land they farm.  The (presumably) unintended consequence of the Government’s decision will be that many farmers will think long and hard before locking up their land for multiple decades in nature recovery schemes. This is because:

• Faced with a hefty financial hit as a result of the death (perhaps even premature death) of a farmer, many asset rich but cash poor farmers will decide to return to intensive their farming methods to try to boost their income whilst they can. This will unfortunately result in the neglect of many sustainability initiatives and see a backslide on the progress made in recent years to improve on our already depleted natural environment.

• The worrying prospect of having to sell or break up farms following a death may have a chilling effect on the willingness of farmers to enter long-term, multi-decade nature recovery schemes. Nature recovery schemes are typically long term – for example at least 30 years for the creation of off-site biodiversity units for Mandatory Biodiversity Net Gain or between 80 and 125 years for nutrient neutrality schemes. The ELM Landscape Recovery Schemes are typically for 20 years, requiring legal agreements which bind land in order to receive public and private sector funding. An unwillingness to enter into natural capital schemes may drive down supply and drive up the price of biodiversity units and nutrient neutral credits. If those costs increase it is highly likely they will be passed on to home buyers of new developments in the form of higher house prices – another unintended consequence of the Government’s decision on IHT.

If farmers are forced to abandon or scale back their environmental efforts to secure their financial future, the Government's long-term agricultural and environmental objectives could be at risk. The question now is whether the Government fully considered these potential unintended consequences when it made its decision on IHT. Given how it conflicts with their wider environmental policies, presumably they did not. It now needs to take steps to correct this mistake.