What did the Office for Budget Responsibility reveal about the ‘tractor tax’?

New information from an independent watchdog shows there is ‘high uncertainty’ that Rachel Reeves’s Budget changes to inheritance tax on farms would raise £500m a year, as John Rentoul explains

Tesco, Lidl and the Co-op, three of Britain’s biggest retailers, have joined calls for Rachel Reeves to abandon her inheritance tax raid on farmers, claiming that “the UK’s future food security is at stake”.

This intervention by normally non-political businesses, adding their names to a list that already includes Sainsbury’s, Asda and Morrisons, is embarrassing for the chancellor as she tries to drum up investment in Britain at the World Economic Forum in Davos, the ski resort in Switzerland.

The new pressure on the unpopular policy, which she announced in her Budget in October, comes on the same day that the Office for Budget Responsibility (OBR) published new information about how it arrived at its estimate that the change will raise £500m a year.

What does the new OBR document say?

It confirms that its central estimate for the policy is that it would increase revenue by £0.5bn a year by the end of the five-year forecast period – that is, by 2029-30. It explains that a “static” model suggests that the change would raise £0.75bn, but that factoring in “behavioural response” would reduce that yield by around 35 per cent.

This means that many farmers and their families are expected to reorder their affairs in an effort to reduce their tax liability.

The estimate was published in the OBR’s forecast at the time of the Budget, but the OBR says it has received requests for “further detail” about how it arrived at its figures – hence the new document. “We will, as far as possible, meet any requests to release supplementary forecast information where this will improve the quality of public debate on the public finances,” the document says.

The “further detail” is not particularly surprising. It reveals that older farmers are assumed to be less likely to take action to avoid the extra tax: “In the medium term, it is likely to be more difficult for some older individuals to quickly restructure their affairs in response to the measure.”

How reliable is the OBR estimate?

“This policy costing was assigned a ‘high’ uncertainty rating,” the OBR says. The document lists the ways in which the OBR expects farmers to avoid the tax: “Greater use of other reliefs, greater bequests to charity and potentially running down the value of estates are likely to be the main behavioural channels in the medium term.”

But it admits that this is mostly speculative, and that its uncertainty “reflects the relative lack of academic evidence on the elasticity of IHT [inheritance tax] receipts to policy changes”.

In any case, the OBR says, “the yield from this measure is not likely to reach a steady state for at least 20 years”.

Is this likely to change Reeves’s mind?

The unexpected calls from supermarkets to drop the change are more likely to influence the chancellor, but the uncertainty around the OBR’s estimate of the yield that can be expected from the policy could make it easier for her to make adjustments.

It might even provide an excuse for a retreat in the Budget this autumn: one of the key facts about Reeves’s policy, as the OBR paper reminds us, is that it is not due to take effect until April 2026, which means that there is still plenty of time for her to change course.