The spring Budget saw the Chancellor slip in some tax increases by freezing various annual allowances – but, it was clear that much of what he would have liked to have announced was deferred given that we are still in the grip of the Covid pandemic. However, there is still a debt to be repaid.
Despite many predicting otherwise, Mr Sunak left capital taxes such as capital gains tax and inheritance tax alone. Such capital taxes are enormously important to the property and investment-heavy business of farming.
However, it still seems very likely that there are big changes afoot, which may come in before next year’s Budget, possibly in the Chancellor’s autumn statement.
That doesn’t give much time for farming businesses, and especially family farming businesses, to get the right business structures in place to minimise the effects of what will almost certainly be a further tax raid, this time on capital.
As well as CGT and IHT, all sorts of reliefs are also under review as part of the consultation. These include CGT uplift on death, which enables assets to be inherited at the market value at time of death, rather than the value at the time they were acquired by the deceased; Agricultural Property Relief, which potentially allows for agricultural property to be passed on free of IHT, and Business Property Relief, which potentially reduces the value of a business or its assets when it comes to working out how much IHT is due.
Given that any changes may be effective as soon as they are announced (and that could be as early as the autumn), what should farm businesses be doing now to mitigate the effects of any capital tax raid on their assets (especially since a piece of advice given by one wit is to die before the autumn, which is not a course of action I would recommend)?
First and foremost is to review the timing of any asset transfers which you might already be considering. Until now, transferring business assets during your lifetime, taking advantage of Agricultural and Business Property Reliefs, would have resulted in the loss of any CGT uplift on death – but if this is to disappear anyway, it may make sense to get in while other reliefs are still as beneficial as they are.
Secondly, all farm businesses should be reviewing their very structure to make sure that they are as tax efficient as possible. With the promised rise in corporation tax, incorporating is now a more nuanced decision to make, but ensuring that any partnership agreements are watertight – many in farming are still based on verbal agreements – is a must.
Finally, any farm business which is contemplating the sale of assets should, if possible, consider getting on with it. Measures under consideration include aligning CGT with income tax rates, reducing CGT annual exemption and the withdrawal of business asset disposal relief (formerly entrepreneurs’ relief). So delay could be costly.
CGT and IHT generate much less revenue for the government than income tax but, the Chancellor is hamstrung regarding the latter due to manifesto pledges not to increase income tax rates. This doesn’t leave too much room for manoeuvre so it is important to at least review your capital tax position sooner rather than later.