Farming isn't for the faint-hearted – and isn't profitable

Wheat on the background of stock charts, farming concept

(Image credit: Getty Images)

published 18 July 2025

The government’s imposition of inheritance tax (IHT) on farms has shone a light on an uncomfortable truth: returns on farming in the UK are generally poor. This leaves farmers reliant on capital appreciation for a reasonable return and without the ability to save enough to pay a periodic capital tax.

The government says land values have been inflated by the wealthy acquiring farms as part of their IHT planning, so imposing IHT will lower land prices and allow aspiring farmers to buy in. However, it is surprising how many wealthy people, such as Jeremy Clarkson, were initially attracted to farming by its tax advantages, but soon became hooked.

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The imposition of IHT will neither raise revenue nor lower land prices. Farmers can avoid it by giving away their farms more than seven years before death, or by turning their farms into partnerships. By making themselves the managing partner, they can retain control of the farm while giving partnership shares to family members, thereby multiplying the threshold value of the farm at which tax becomes payable.

Ian Ivory, a fund manager turned farmer in Scotland, focuses on his return on capital. He argues that land, primarily seen as a hedge against inflation (it has multiplied in value by 22 times since 1971, on average), should be compared with a 10-year index-linked gilt, which yields 1.25%. A 5% cash yield should be applied to residential property, whether the farmhouse or cottages are available for rent or holiday lets. The return from livestock and equipment has to provide a return of 7%. “To achieve those targets, we need to have a pre-tax profit margin of 20%, but most farms struggle to hit 10%,” he says.

The problem is that prices have not kept pace with costs. “In 1971, wheat sold for £28 a tonne; now it’s £180, a [sixfold increase]. But wages have risen 45-fold, so remaining profitable has required increasing automation. Labour costs are now below 10% of our sales and subsidies also.” Agricultural prices have fallen far behind costs. In 1970, 165 lambs were needed to buy a stock tractor, but now the figure is 865. Fifty tonnes of grain were needed to buy an arable tractor; now it is 600.

Agricultural productivity has increased rapidly worldwide, but nowhere more than in the former Soviet Union. In the late 1980s, under collectivisation, the whole of the USSR was importing 30 million tonnes of grain a year. Now, Russia alone exports 50 million, while Ukraine, before the Russian invasion, exported 60 million. Eastern Europe will have added to the glut, and lower prices will have fed through into meat prices. In the past year, says Ivory, UK beef prices have risen 60%, but grain prices have fallen.

Not only are farmers burdened with price volatility and falling prices, but the UK also struggles to compete globally. In New Zealand, Ivory says, sheep sell for £3 a kilo at a profit, while in the UK they sell for £6 at a loss. Farmers who can’t adapt or continue to farm as their families always have are inevitably struggling. Innovation and adaptation can offer a way out. Clarkson’s Farm shows a constant enthusiasm for new ideas, whether it’s a farm shop, a restaurant or a different crop, such as growing willow trees, whose wood commands high prices in the manufacture of cricket bats. Yet by the time the wood is ready to harvest in 15 years’ time, the price may have collapsed, as others have had the same idea.

James Dyson, owner of the largest farming business in the UK, has extended the season for English strawberries by growing them above ground in huge greenhouses, powered by renewable electricity and heat from an adjacent anaerobic digester. He is a champion of the use of technology to improve productivity. But few farmers can afford the capital investment required. For many farmers, land, geography and resources limit diversification. Farmers’ markets may help them get around the rigid pricing of the supermarkets; co-operation with neighbours to share resources should reduce costs; and there may be scope to turn commodity agricultural output into a branded product. But the success of the few shouldn’t blind us to the struggles of the many.

Subsidies to farmers were £2.4 billion a year in the last parliament, but are being phased out. They come with environmental bureaucrats and politicians who treat farming with, at best, disdain. No wonder many farmers are attracted to the Sustainable Farming Incentive, newspeak for paying farmers not to farm on the premise that the authorities know more about environmentally sustainable farming than they do. As a last resort, farmers can always turn their land over to solar panels, although many are suspicious that the incentives won’t last.

It is remarkable that this densely populated country produces about 60% by value of the food it consumes. Moreover, the value of exports of food, feed and drink is nearly half that of imports. Agriculture uses 70% of the UK’s land area, but employs just 447,000 people, 1.4% of its workforce. Employment has fallen 6% in the last 20 years, but the decline of market towns all over the UK is a testament to lower incomes and a faster decline in related businesses, as well as to the increased productivity of farming. High farm values and Horace’s rural idyll provide a misleading picture of farming, now a capital-intensive, highly skilled vocation entailing constant innovation, long hours, volatile pricing and endless bureaucracy. This is not a business for the faint-hearted.

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.