FW Opinion: More policy details needed to aid tax planning

Many budgets have come and gone in recent years without significant changes to inheritance tax (IHT), leaving most of the reliefs in place in what is widely acknowledged as a generous regime for agriculture.

However, with a rapidly growing national debt and reviews of both IHT and now capital gains tax (CGT) from the Office of Tax Simplification (OTS), the chancellor’s 2021 spring statement may contain measures that will affect farmers and landowners.

See also: Capital Gains Tax rate should double, review proposes

The Covid-19 pandemic has caused the cancellation of this autumn’s budget, and next week the government’s comprehensive spending review will cover just one year instead of the usual four, demonstrating the extent of the financial challenge.

However, the treasury is under no obligation to act on the OTS recommendations, and there is likely to be an element of caution to avoid real damage to the government’s core supporters.

The latest OTS report on CGT recommends reform that could see rates double for some taxpayers and a cut in the annual individual exemption from £12,300 to between £2,000 and £4,000.          

Thankfully, the review did not propose changing rollover relief, which allows businesses to roll a gain that would otherwise be taxable into another trading asset.

Nor did it attack gift holdover relief, which allows a potential CGT liability to be deferred and passed to the person to whom a gift is made – for example, when farming assets are gifted during a person’s lifetime without any money changing hands.

But one of the most serious considerations for landowners is that, as in the earlier review of IHT, it has also recommended that there should be no CGT uplift on death, where IHT relief is claimed.

This uplift allows a beneficiary to inherit at the value of the asset at the date of death, rather than at the time the asset was purchased or otherwise acquired.

However, the OTS has suggested that, if the government does remove the CGT uplift on death, the property value for long-standing assets should be based on their value in 2000, which in most cases would be more favourable to the taxpayer than the current March 1982 base.

The IHT review also suggested that a test for whether assets qualify for 100% business property relief (BPR) should be aligned with the level used in a similar test for CGT.

This would mean that, in order to qualify for BPR, the ratio of trading to investment in a business would be 80:20, compared with the 50:50 ratio currently in use.

The steeper test would jeopardise BPR for some, and would present a particular risk for diversified enterprises with a large proportion of rental income.

All of this has led to familiar calls for farmers and landowners to address succession and long-term tax planning sooner rather than later, in anticipation of some of these capital tax changes.

That planning would be made easier by having a steer from government on some other aspects of tax policy – for example, how “lump sums” of BPS entitlements, as provided for in the Agriculture Bill, will be taxed.

There is also the question of how payments for environmental rather than agricultural activities will be treated for tax purposes.

The transition to Environmental Land Management (ELM) starts with a reduction in the Basic Payment Scheme next year. Farming decisions and plans cannot be sensibly made without more information on both the level of BPS reductions and the related tax policy in transition and under ELM.