Forewarned is forearmed
Following on from our pre-budget newsletter earlier this year, and the subsequent covid-centric Budget in March, there are now rumours that an emergency budget will be called as soon as the Government feels it is appropriate to do so, which may be sooner than the scheduled Autumn Budget.
We are all acutely aware of the unprecedented public spending, which continues day by day at a pace and level never before seen, which will ultimately mean increases in taxes, certainly in the short to medium term.
The Government has previously been presented with two Reports (one by an all-party parliamentary group (APPG) ‘Reform of inheritance tax’ (January 2020) and a report by the Office of Tax Simplification (OTS) in December 2019) with suggestions of how to simplify the tax system. Changes in the March 2020 budget were expected in line with some of these suggestions, but perhaps delayed until the Covid-19 cloud has lifted. However, with a further budget looming we need to be live to the discussions that may be happening in the Treasury about simplification of our capital taxes and the impact they may have on farmers and landowners if they were to be implemented.
The main proposals are:
- The current rate of Inheritance Tax of 40% is replaced with a new flat rate of 10% for estates under £2million and 20% for those estates above. In addition, the reliefs currently in place would be abolished.
- Agricultural Property Relief (APR): Farmers and landowners currently benefit from APR on their estate (subject to satisfying certain conditions), and an uplift in value as regards Capital Gains Tax on death; meaning that they can pass a farming asset down to the next generation without paying IHT or CGT.
It is suggested that gives farmers an unfair advantage and in order to tackle this, the APPG have recommended removing APR in its entirety and applying the Inheritance Tax rate (10% or 20%) across the whole value of the estate, to include the farm and lands. This could have serious ramifications for those who have already put in place succession plans and organised their estate based on the current IHT rules, and also for the ongoing viability of the farm for successors in title. Currently, regardless of the value of the deceased’s estate, where a farmer dies and gifts a farm on death, no IHT is payable (provided the relevant conditions are met).
- Capital Gains Tax (CGT): Not only will farmers have the above to contend with, but the proposals go further and suggests that the estate should not benefit from CGT uplift on death. Under that proposal , if Executors were to sell the property during the course of the administration of the estate then CGT would be 20% or 28% of the gain since the deceased acquired the property, which could be decades ago, and the gain upon which the CGT is calculated would be quite substantial. This would mean that should the farm be gifted on death to the next generation then they would inherit the deceased’s CGT liability (valued as at the date of their acquisition) and, should they sell, they would have both liabilities to pay.
- Business Property Relief (BPR): Deceased farmers currently have the benefit of applying BPR against the trading assets of the farming business. The APPG Report suggest that this should be scrapped in its entirety meaning that the value of those assets would also be subject to Inheritance Tax. The OTS Report however does not go as far as to suggest it should be abolished but instead that it is tightened, with particular regards to how the ‘wholly or mainly’ test is applied. This relates to the balance between trading assets and investment assets within a business. It is perhaps therefore a good time to review the accounts and consider the income and asset value balance between the trading and investment elements involved in the business.
- Gifts: Currently, all individuals have an annual personal allowance of £3,000 which they can gift without it forming part of the estate for inheritance tax purposes. If amounts above this are gifted, they form part of an estate on death unless the gifts have been made more than 7 years before death. The APPG’s preferred option is to tax ALL lifetime gifts (other than those to a spouse or Charity) when made at 10%, subject to a £30,000 annual allowance. The current 7-year rule and the tapering tax would also both disappear. The 10% charge would apply to gifts of farm/farmland although it is proposed that it could be paid in 10-year interest free instalments. In addition to the lifetime gift tax, it is suggested that Capital Gains Tax should also be payable on the disposal. The value of farmland means that there would be substantial tax to pay if these rules in relation to gifts during lifetime came into effect.
As farmers there are many tools in your current armoury which may possibly be taken away in their entirety. At Agri Advisor we encourage discussions about succession planning at an early stage within farming businesses and think it is important that we ask questions about the future plan for the farming business, for individuals within that business and assist our clients to come up with a plan that enables them to realise their aims and objectives. These are not conversations to be left until another day as the process of succession planning is often one which takes time and careful consideration. There are so many uncertainties that we have to contend with but succession planning is one aspect where you can minimise risk and uncertainty by taking control and putting things in place.
Please feel free to contact myself, or a member of our specialist succession planning team, to discuss further or seek advice.