How the ‘tractor tax’ became a problem for Rachel Reeves

It was one of the smaller tax-raising measures in the chancellor’s Budget but is fast becoming a big headache for the government, says James Moore

Rachel Reeves is caught in the crosshairs of a piece of alliteration that threatens to unravel part of her Budget: the “tractor tax”.

It is the sort of phrase that can easily become lodged in the public mind, especially when attached to words such as “cruel” and “spiteful”.

Why is the chancellor suddenly clobbering combine harvesters? Well, she’s not doing that directly; it’s when they’re inherited that the tax hits.

If you have a sizeable enough investment portfolio to pass on – or even just a modest house in London or South East England – a bequest to anyone other than your spouse or civil partner will be subject to inheritance tax (IHT) at 40 per cent, above a £325,000 threshold. However, the transfer of agricultural land and assets was completely tax-free; this could include stud farms, a farmhouse, or even the residence of retired farm workers. Similar relief covered business property and assets such as buildings, unlisted shares, machinery and so on.

On a spreadsheet, this seemed an anomaly. Beneficiaries from the will of a careful investor would potentially pay a hefty sum whereas those of a wealthy farmer might not pay anything.

After the Budget, that changes. Farms are still favourable assets to leave. But any bequest of zero-rated assets above £1m will now attract an inheritance tax of 20 per cent. This is the first time family farms have faced such a tax.

The money raised through this levy is likely to be quite small, certainly when compared to the billions that will flow to the Exchequer from hikes to employers’ national insurance contributions. Which is a tax on jobs. And also a tax on working people who will feel it through lower wage settlements.

The same goes for the number of people affected. But a lot more people worry about inheritance tax than ever actually pay it and it is always the little things that create the big problems for chancellors and their Budgets.

Reaction to the IHT changes is a case in point. It has been furious. Sir James Dyson – who is turning into Britain’s own mini-Musk – says it will lead to “the death of entrepreneurship”. Reeves will “kill off” homegrown family businesses with her “ignorant swipe at aspiration”, he claims.

However, a change to IHT relief is not going to deter entrepreneurs from finding new ways to make money.

Sir James might also care to reflect that it is quite possible this tax-raising Budget would not have been necessary had the economy not lost £140bn as a result of the Brexit he vociferously supported. (That figure is from Cambridge Economics and was published in a study commissioned by the mayor of London at the beginning of the year; it’s probably even bigger now.)

But the problem for Reeves is that IHT is horribly unpopular, even though a small minority of estates (fewer than one in 20, pre-Budget) are liable to pay it. Parents are fiercely opposed to their children paying tax on assets that the Exchequer has already taken a chunk out of. Polling by YouGov found this “double taxation” was cited by a substantial number of those who feel the tax is unfair. And a sizeable majority of people feel it is deeply unfair. Some 56 per cent of those responding to its survey on the issue (in 2023) favoured scrapping it entirely.

Having identified a £22bn black hole in Britain’s public finances, Reeves had little choice but to raise raise taxes, before one even considers the nation’s increasingly shabby public services. They are desperately in need of investment.

But with the “tractor tax”, she has created a nasty political headache for herself and for a new government that has proved itself remarkably error-prone.

This measure is shaping up to be far more trouble than it is actually worth in terms of the cash it’s going to raise. Sometimes chancellors have to look beyond the spreadsheet.