Labour’s Fiscal Reforms and the Long-Term Investment Risks for UK Agribusiness

The UK’s 2025 fiscal reforms, spearheaded by the Labour government, have ignited a contentious debate over their implications for agriculture and food security. While the reforms aim to modernize tax systems and fund public services, their long-term risks for agribusiness and rural-dependent sectors are profound. From inheritance tax overhauls to supply chain disruptions, the sector faces a complex web of challenges that could reshape the UK’s agricultural landscape.

Inheritance Tax Reforms and Farm Viability

The most contentious reform is the 2026 inheritance tax (IHT) changes, which cap Agricultural Property Relief (APR) and Business Property Relief (BPR) at £1 million. Estates exceeding this threshold face a 20% tax rate on surplus value, payable over a decade interest-free [1]. This policy, while framed as a move toward fiscal fairness, threatens the continuity of family farms. Over 75% of commercial family farms now exceed the £1 million threshold, forcing many to sell land or assets to meet tax obligations [2]. The National Farmers’ Union (NFU) warns that such sales could fragment farmland, disrupt supply chains, and reduce economies of scale, ultimately undermining food security [3].

For example, a 400-acre arable farm could face a £560,000 IHT liability, requiring 50% of its annual profits to cover the tax [4]. This financial strain is compounded by the sector’s “asset-rich, cash-poor” nature, where liquidity is tied to land rather than cash. The result? A potential wave of land sales, particularly in regions like Yorkshire and the East of England, where investment cuts could reach 17% [5].

Supply Chain Adjustments and Policy Uncertainty

Beyond tax reforms, Labour’s abrupt closure of the Sustainable Farming Incentive (SFI) scheme to new applicants in March 2025 has exacerbated uncertainty. The SFI, designed to reward sustainable practices, was halted due to funding exhaustion, leaving farmers in limbo [6]. This stop-start approach to policy has eroded trust, with 49% of family farms pausing or canceling planned investments since the budget announcement [7].

The government’s delayed rollout of the Environmental Land Management Scheme (ELMS) further complicates matters. While ELMS aims to support farmers in adopting sustainable practices, its fragmented implementation—coupled with a £100 million annual budget cut—limits its effectiveness [8]. For agribusinesses reliant on long-term contracts with processors and retailers, such instability raises operational costs and market volatility [9].

Farm Profitability and Fiscal Pressures

Farm profitability remains fragile despite a modest 9% drop in 2024 profits to £6.55 billion [10]. High fixed costs, volatile commodity prices, and delayed government support programs have left many farms vulnerable. The Office for Budget Responsibility (OBR) notes that the UK’s debt-to-GDP ratio of 94% and elevated borrowing costs could further constrain future support for agribusiness [11].

Moreover, the government’s £5 billion farming budget over two years—while a step forward—fails to address structural challenges. For instance, the closure of the SFI and delays in ELMS implementation create funding gaps that deter investment in sustainable practices [12]. This is critical, as 76% of farmers plan to adapt their business models to align with environmental policies, yet only 48% feel confident in their ability to do so [13].

Macroeconomic Risks and Investor Considerations

The broader fiscal environment adds to the risks. The OBR highlights that the UK’s public finances remain precarious, with limited fiscal flexibility to address future shocks [14]. For agribusiness investors, this means regulatory and reputational risks are heightened. Farms facing tax-driven asset sales may prioritize short-term compliance over long-term sustainability, increasing the likelihood of land degradation and reduced yields [15].

Conclusion

Labour’s 2025 fiscal reforms, while politically motivated, expose agribusiness to significant long-term risks. Inheritance tax changes threaten farm continuity, supply chain adjustments create operational volatility, and fiscal pressures limit profitability. Investors must weigh these factors carefully, considering both the immediate financial burden on farms and the broader implications for food security. As the government navigates these challenges, a more strategic and equitable approach to rural policy-making will be essential to safeguard the UK’s agricultural future.

Source:
[1] Economic and planning policies: Impact on farming and rural communities [https://lordslibrary.parliament.uk/economic-and-planning-policies-impact-on-farming-and-rural-communities/]
[2] An impact analysis of APR reforms on commercial family farms [https://www.nfuonline.com/updates-and-information/an-impact-analysis-of-apr-reforms-on-commercial-family-farms/]
[3] Budget 2024: Inheritance tax, family farms and food security [https://lordslibrary.parliament.uk/budget-2024-inheritance-tax-and-family-farms/]
[4] The Impact of Changes to Inheritance Tax on Farm Estates [https://centax.org.uk/policy-brief-the-impact-of-changes-to-inheritance-tax-on-farm-estates/]
[5] New Research Shows Full Impact Of IHT changes [https://familybusinessuk.org/new-research-shows-full-impact-of-iht-changes/]
[6] Spending Review 2025: a commitment to farming [https://defrafarming.blog.gov.uk/2025/06/16/spending-review-2025-a-commitment-to-farming/]
[7] Farmer Opinion Tracker for England: April 2025 [https://www.gov.uk/government/statistics/farmer-opinion-tracker-for-england-april-2025/farmer-opinion-tracker-for-england-april-2025]
[8] Labour cutting farming budget in England by £100m a year [https://www.theguardian.com/politics/2025/jun/16/labour-cutting-farming-budget-in-england-by-100m-a-year-spending-review]
[9] The Impact of Labour's Tax Policies on UK Agribusiness [https://www.ainvest.com/news/impact-labour-tax-policies-uk-agribusiness-food-security-2509/]
[10] Outlook 2025: Lower inflation offers hope for UK economy [https://www.fwi.co.uk/business/markets-and-trends/outlook-2025-lower-inflation-offers-hope-for-uk-economy]
[11] Fiscal risks and sustainability – July 2025 [https://obr.uk/frs/fiscal-risks-and-sustainability-july-2025/]
[12] Fiscal risks and sustainability – July 2025 [https://obr.uk/frs/fiscal-risks-and-sustainability-july-2025/]
[13] Farmer Opinion Tracker for England: April 2025 [https://www.gov.uk/government/statistics/farmer-opinion-tracker-for-england-april-2025/farmer-opinion-tracker-for-england-april-2025]
[14] Fiscal risks and sustainability – July 2025 [https://obr.uk/frs/fiscal-risks-and-sustainability-july-2025/]
[15] The Impact of Labour's Tax Policies on UK Agribusiness [https://www.ainvest.com/news/impact-labour-tax-policies-uk-agribusiness-food-security-2509/]