Farmers should enjoy their favoured tax status, while it lasts

Many commentators were anticipating major changes to Inheritance Tax (IHT) and/or Capital Gains Tax (CGT) in the March budget to raise additional tax revenue to cover the cost of the COVID pandemic. Surprisingly, as it turned out, there were no changes to these taxes apart from the fact that the IHT nil rate band (the amount that can be left free of IHT) and the CGT annual tax free allowance were frozen at £325,000 and £12,300 respectively til 2025/26. That is not to say that there will be no further changes to these taxes and significant reform remains a real possibility given the state of the nation’s public finances.

These taxes are important for the agricultural sector as they impact on the ability to pass on the farm to the next generation and for those looking at retirement, they determine the amount of tax payable on any gains made on the sale of the farm. They are also interlinked.

At present, farmers enjoy a very favoured tax status when it comes to IHT in that the value of the land, buildings and farmhouse are normally covered by Agricultural Property Relief (APR), meaning that these assets can be left to the next generation on death without incurring any IHT. There is no cap on the value of APR that can claimed. The beneficiary also benefits from acquiring the asset at full market value at date of death, meaning that CGT on any subsequent sale will be either greatly reduced or eliminated by this free uplift in value on death. So, to recap, no IHT on death and no or very little CGT on subsequent sale. A win win situation if ever there was one.

Can this last? Judging by the level of interest we have seen from clients looking to make lifetime gifts, many would appear to think not.

A lifetime gift of an asset is normally treated as a disposal for CGT in the same way that a sale to a third party would be. It is however possible to avoid this on the gift of agricultural assets by making what is known as a “holdover” election. Under a holdover election, the recipient acquires the assets at the donor’s original cost and any latent capital gain is held over until the asset is sold by the new owner. CGT is therefore likely to be much greater on subsequent sale, as unlike acquiring an asset through inheritance, there is no free uplift to market value at date of transfer. This of course only matters if there is an intention to sell at some point in future.

Making a lifetime gift of the farm could therefore be a way to protect against any adverse future changes to IHT. A lifetime gift also provides certainty over asset destination and gives the younger generation a greater stake in the business, which will hopefully be rewarded by a greater level of commitment and motivation.

It goes without saying however that the donor’s top priority should be their own economic security, and this should be considered first before any decision is made to gift assets.

Those contemplating exiting the industry in the next few years also need to think carefully about the timing of any sale as there has been talk of more closely aligning CGT rates with those of income tax. At present, the top rate of CGT payable on a land sale would be 20% compared to a top UK rate for income tax of 45%. It may also be possible to get up to £1m of gains at a reduced rate of 10% if the sale qualifies for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief).

If it is right for your circumstances, there is perhaps currently a window of opportunity to hand over or sell assets while the tax regime is still relatively benign. To discuss further, please get in touch with our EQ Agriculture team by calling one of our offices or by emailing agriculture@eqaccountants.co.uk.

Alternatively, if you would like advice on any tax related issues affecting your agricultural business, please email our EQ Taxperts.