Tax Considerations and Succession Planning for Farming Businesses

Tax Considerations and Succession Planning for Farming Businesses

The Autumn Budget scheduled for this month has been cancelled so immediate tax increases are off the table for now. The pandemic is resulting in huge borrowing levels for the UK. The figure is expected to be around £370 billion for the current year, before the second lockdown for England was announced on 31 October. These debt levels have not been seen since the Second World War and will have to be addressed. The one obvious solution to bringing the debt level under control is to increase taxes. But what could that mean for farmers and landowners?

The three big contributors to the Exchequer are VAT, Income Tax and National Insurance but the Government has pledged not to increase the rates of those taxes. There is also a major problem that increasing taxes at this time could easily snuff out any economic recovery. Increases in VAT, Income Tax and National Insurance should not be ruled out completely in the medium term however, as these are exceptional times and the electorate may accept an increase in the circumstances. Boris Johnson said last year that ‘levelling up’ of social equality would be a priority for his Government and that may involve increasing taxes on capital and wealth.

There has been some speculation that a wealth tax could be introduced and applied to net assets (excluding main residence and pensions) above a certain threshold.  Some countries in Europe have a wealth tax with rates from 0.2% up to 2.5% with no exemption for business assets. By way of illustration of how this could work if the UK  introduced a similar model applying to assets over £1m at a rate of 0.75% and you own a farm worth £5m with no borrowings, you could face an annual wealth tax bill of £30,000.  Other countries have introduced such a tax and then quickly withdrawn it finding it very difficult to administer, unpopular and not producing the levels of tax expected. I think it is unlikely that such a tax will be introduced in the short term. Such a tax could be introduced longer term but reducing allowances and reliefs and increasing the rates of current capital taxes seem a far more likely course of action.

Capital Gains Tax (CGT) on disposal of assets is currently payable at a basic rate of 10% (18% for residential property) and a higher rate of 20% (28% for residential property). These rates could be increased to closer reflect income tax rates so perhaps 20% basic rate and 40% higher rate.  If considering selling or giving away assets in the near future you may wish to accelerate the disposal to take advantage of the current low rates, particularly if it is an asset which may not qualify for a CGT relief, such as a let cottage or stocks and shares.

There have also been recent reports as to how Inheritance Tax (IHT) might be reformed. Many farmers have traditionally dealt with passing on the farm through their will on death and with the availability of 100% Agricultural Property Relief there can often be no inheritance tax due with the added attraction of the farm passing to the next generation at market value on death for CGT purposes. The suggestion is this CGT uplift should be removed meaning that beneficiaries could face a large CGT bill if they wish to sell. IHT Reliefs for Agricultural and Business Property may be reduced or removed but as these both play key roles in avoiding the break up of farming businesses this may save them.

If you are considering succession planning or a restructure of your farming business now would be a good time to put those plans in place while the reliefs are available to use for efficient tax planning. The reliefs may not be around if you put off or delay.

If you would like to discuss tax planning for your farming business contact Alan Taylor on 01738 441 888 or email alan.taylor@azets.co.uk.

Alan is a Partner at Azets, accounting, tax, audit, advisory and business services group.