Rural Intelligence
for
Farms & Estates WINTER 2024
Introduction Welcome to our Winter 2023 Agri Intelligence. As ever we aim to bring you up to date with the latest on financial and tax matters impacting rural businesses. In this issue we bring you an update on the 2023 financial results from the dairy sector as well as an important business property relief case for inheritance tax purposes which is relevant to many diversified farm and estate businesses. There has also been a lot in the press regarding inheritance tax so there is an article on this too – what might change with a new Government. Over the summer we were pleased to welcome Liz Jones back to Albert Goodman – she has joined as a Director of the Farms and Estates and I hope many of you will meet her. I would also like to congratulate Grace Popham on not only qualifying for the London International Horse Show but being placed in the competition too on her horse, Ted. A huge achievement.
Finally, as we plan for the end of another tax year, please take time to read the article on tax year end planning, as well as the change in basis periods and get in touch if you have any queries.
Sam Kirkham PARTNER AND HEAD OF FARMS & ESTATES TEAM
INTRODUCING LIZ JONES Since our last newsletter we have welcomed Liz Jones to the team. Joining as a director, Liz trained and qualified as a certified accountant with Albert Goodman from 2000 to 2006 when she moved to a firm closer to home. Having since qualified as a chartered tax adviser and chartered accountant, Liz has spent the last 16 years managing a portfolio of clients as well as advising on succession planning, inheritance tax issues, capital gains tax, and business planning for clients in both the agricultural and rural sector as well as for more commercial businesses. On a personal level, Liz is married to a farmer and contractor and helps with the accounts and administration side of the business. They have a young daughter and so is kept busy outside of work as well!
LIZ JONES Farms & Estates Team liz.jones@albertgoodman.co.uk
THE AUTUMN STATEMENT We had a fairly flat and disappointing Autumn Statement in November, with no increases to the basic rate bands to help soften the cost of living but a small win for the self-employed sole traders or partnership businesses. They will benefit from a 1% reduction in Class 4 National Insurance Contributions (NICs) on amounts earned between £12,570 and £50,270 from 6 April 2024. Class 2 NICs will also be abolished. However, those with profits of less than £6,725 per individual will still need to pay voluntary Class 2 NICs to maintain their rights to state pension. There are similar reductions to NICs for employees but by 2% from 12% to 10%, so those running their businesses through a limited company and are paid a salary might benefit from this. However, most owner-managed companies tend to extract profits primarily through dividends and loan accounts rather than salaries, so their position is effectively unchanged. Whilst full expensing was made a highlight of the budget, allowing those investing in plant and machinery to receive 100% tax relief on the purchase, this is of little benefit for those businesses who spend less than £1M a year as this will continue to be covered by the annual investment allowance. Full expensing is also only available to limited companies. There was also no further guidance or changes to legislation to ensure continued relief on land which currently qualifies for agricultural property relief for inheritance tax purposes but will come out of agricultural production for environmental use. The lobbying and pressure on Government will need to continue through further consultations. We have another budget in the spring so lets hope for some better news then.
SAM KIRKHAM Farms & Estates Team sam.kirkham@albertgoodman.co.uk
COGWD – COST OF GETTING THE WORK DONE! This time last year dairy farmers were worried about rising input costs and how this may impact the bottom line of their March 2023 accounts. We at Albert Goodman are currently very busy with these year ends and therefore have the ability to review the financial performance of many different farming businesses. As a result, I thought this would be a good opportunity to consider how input costs have changed over the last few years using the actual results we have seen so far. One of the measures that we use when reviewing the efficiency of a dairy farm is the cost of getting the milk out of the cows. We call this COGWD – the cost of getting the work done. We measure this as the labour, plus power and machinery costs (including contracting), divided by the number of litres produced. After feed, it is the largest cost on most dairy farms and for the purpose of this article, it is the measure that I have chosen to analyse. COGWD varies hugely depending on the system that the farm operates. For example, a block calving dairy herd which grazes cows as much as possible would have a much lower COGWD than average. A high input, high output, housed dairy farming system would have a much higher COGWD in comparison.
You could argue that feed and fertiliser took the biggest hit in terms of rising input costs for dairy farmers, however fuel and labour costs also saw considerable increases, both of which are considered within the COGWD measure. The average milk price increase for the same period was around 38%, which leaves a considerable margin for other increasing input costs such as feed and fertiliser. This research shows that farmers have fared well to mitigate against rising input costs by controlling their costs and increasing their supply of milk. This increase in gross margin is often accompanied by an improved net profit margin which in turn, has resulted in higher tax bills to be paid in January. The tide, however, has turned since the spring, with farmers now seeing a large reduction in milk price. This will cause a huge squeeze on cash flow and with the January self-assessment deadline looming, increased tax payments should be taken into consideration when budgeting for the next 12 months.
When doing the research for this article I selected a range of different dairy farming systems and compared their COGWD for the financial year 2021 to their COGWD for the financial year 2023. The results were largely as I had expected, if not marginally better. The average increase in COGWD was 17%, however during this time there was also an average increase in milk output of 4%. Therefore, the COGWD increase of 17% was reduced to 12% by spreading the increased input costs over a greater supply of milk. If you compare this to the AgInflation Index, which showed a jump in input costs of 34% in the 12-month period to September 2022, then this is quite positive.
ROSIE TURNER Farms & Estates Team rosie.turner@albertgoodman.co.uk
OBTAINING FINANCE IN A CHALLENGING CLIMATE Farming is a challenging business. Most farming enterprises are subject to fluctuating input and output prices making day to day cashflow difficult to manage. This makes overdrafts and bank loans key to allowing the business to run efficiently. In recent times we have seen lenders become more hesitant when providing short-term finance and often require more information when considering these facilities. This is resulting in longer lead times and frustration from our clients. Overall high street lenders are still supportive of lending to agriculture. However, with the quickly changing pace of farm profitability (as we have seen in the dairy industry over the last year) there is more uncertainty over the serviceability of longerterm debt. This often leads to our clients looking to alternative lenders to provide solutions if they can do so quickly. Below are some key considerations which may help get the green light from your bank or finance provider: Consult with your lender early and don’t wait until the last minute. This is often key with overdraft limits being extended. Planning ahead and knowing two to three months in advance that you require more money, can give you, and the lender, time to consider the options. Prepare a summary document explaining the business and family members. With some lenders now not providing a bank manager for businesses with <£500k of debt, it is often the case that you are
dealing with different people every time you have a finance need. Having such a document allows the manager assisting you to gain an understanding of you and your business. Have quotes ready to support your funding need. This provides clarity regarding the amount needed and provides the lender with confidence. Be upfront with your financial information. It is important to provide your most recent accounts, and if these are not available then some management information from your bookkeeping software. This provides key evidence regarding the business’ ability to service debt. If you have had a difficult year, then asking your accountant to provide a commentary alongside the numbers can be a useful accompaniment to explain the results. When asking for sizable lending, changing your business, or requesting increases to your overdraft facility, it can be useful to provide a cash flow forecast. For example, having a six-month cash flow forecast to support an overdraft extension provides credibility. It illustrates the maximum overdraft requirement and gives clarity as to the expected timescales for things to return to “normal”. Of course, the best chance of obtaining finance is by having a business that can adequately service the debt it requires. It is worth remembering that a well laid out proposal to the bank can sometimes help tip the scales in favour of you and your business.
TOM STONE Farms & Estates Team tom.stone@albertgoodman.co.uk
CHANGE IN BASIS PERIODS –
PARTNERSHIPS OR SOLE TRADES WITH A NON 31 MARCH YEAR END NEED TO PLAN EARLY WHAT IS CHANGING? As you may have read from our previous newsletters, basis periods for income tax purposes are being replaced by the “tax year basis”. If you already prepare your accounts to 31 March or 5 April each year, you won’t be affected by these new rules as you are already being taxed on the tax year basis. The new rules will impact unincorporated businesses, partnerships and sole trades with an accounting year end other than that of 31 March or 5 April. The change will first apply in 2023/24 so from 6 April 2023, with transitional rules applying. If you operate with a different year end, you will have to choose to either: Change your business year end; or Keep your existing business year end and time apportion profits from two accounting periods, to arrive at a tax year basis profit. The following is an example of how the transitional rules will work for a business that has a 30 September year end.
As you can see from the table, this will mean 18mths of profits fall into the 2023/24 tax year which will bring the payment of tax closer to the time that the profits are earnt. RELIEFS IN THE TRANSITION YEAR – OVERLAP AND SPREADING During the year of change there is relief in the form of overlap profits. Overlap profits are profits from your first year of trade which were taxed twice and can be relieved when you move your year-end closer to a tax year basis. However, unless you joined a profitable business the overlap profits may be modest or non-existent. You can also spread the excess profits being taxed in 2023/24 over 5 years from 2023/24 to 2027/28. The amount that can be spread are those from the transitional period less any overlap. These reliefs are shown in the example below. Tax year
2023/24 £
12-month accounting period ending 30 September 2023 (the standard part)
100,000
2023/24 £
6 month period from 1 October 2023 to 5 April 2024 (the transitional part)
60,000
12-month accounting period ending 30 September 2023 (the standard part)
100,000
2023/24 Taxable profits
160,000
Less overlap profits brought forward, say
(10,000)
6 month period from 1 October 2023 to 5 April 2024 (the transitional part)
60,000
Taxable profits
150,000
Tax year
The excess profits of £50,000 can be spread across five tax years, with an additional £10,000 now taxable over the five years from 2023/24 to 2027/28.
This will be taken from the accounts for the year to 30 September 2024 2023/24 Taxable profits
160,000
INTERACTION WITH FARMERS AVERAGING Farmers five-year averaging may also be available; however, you can only average the normal profits and not the excess profits or the transitional profits which you may be spreading over the next 5 years. Although restricted averaging is still a useful tool in tax planning.
Those operating as a partnership with a year end that is not already aligned to a tax year with income from rental property therefore need to consider whether profits can be mitigated in advance of these changes.
PROPERTY INCOME – COMMERCIAL OR RESIDENTIAL LETTINGS
For example, if you have large repairs planned for next year or even the year after, by bringing these forward, to before the 31 March 2024, the additional property profits being taxed due to these changes, could be reduced.
Many rural businesses have additional sources of income in the form of rental income. A farming partnership may let out property as commercial units or residential properties (excluding their own farm workers).
It is also important to remember that there are no capital allowances on capital expenditure on residential property, so, for example, an extension to a residential property would obtain no relief.
For a partner in this type of partnership, the basis periods used for rental profits have been the same as that used for the trade. The change in basis periods will also align partnership property income to the same basis.
There is relief available on capital expenditure for those with commercial lettings. The extension of a commercial unit would result in 3% relief from the cost of the structure itself, however there may be 100% relief (AIA) on integral features such as costs for the lighting, plumbing, heating and of plant such as kitchens and bathrooms if these are installed in the unit.
A major problem for those with property income is that the legislation introduced regarding spreading relief, only refers to ‘trading profits’ and will therefore only apply to your trading partnership income and not income from property, whether that is commercial or residential. Continuing with the example above but now including property income: Tax year
2023/24 £
Partnership period
Total
Trading income
Property income
12-month accounting period ending 30 September 2023 (the standard part)
150,000
100,000
50,000
6 month period from 1 October 2023 to 5 April 2024 (the transitional part)
80,000
60,000
20,000
Total profits
230,000
160,000
70,000
Less overlap profits brought forward
(10,000)
(10,000)
-
Taxable profits
220,000
150,000
70,000
Less spreading profits over 5 years
(50,000)
(50,000)
N/A
Taxable profits after spreading relief
180,000
110,000
70,000
As before, the transitional trading profits of £50,000 can be spread across five tax years. However the transitional property profits of £20,000 cannot be spread.
Partnerships with a year end of 30 April and with property income will be most impacted for 2023/24 as their 2024 tax return will include the period from 1 May 2022 to 31 March 2024 - a total of 23 months. These changes therefore make it even more important to plan for your 2023/24 tax liability early.
SARAH CLEAVE Farms & Estates Team sarah.cleave@albertgoodman.co.uk
BASIC PAYMENT SCHEME ENTITLEMENTS – ANOTHER CLAIM The final claims under BPS were made back in May 2023. The entitlements themselves now have no value and will no longer be tradeable. As the entitlements have no value, those who purchased their entitlements can submit negligible value claims on their 2023/2024 tax returns to recognise a capital loss. This will also include those who have inherited or been gifted entitlements. Those in the dairy industry will remember doing negligible value claims for their Milk Quotas back in 2015. The capital loss recognised from the BPS entitlements can be used against future capital gains from other assets, either during the 2023/24 tax year or carried forward for future years. The capital loss recognised will consist of the purchase price of the entitlements, along with any agents or professional fees incurred as a direct result of the purchase. Establishing the value may be more complicated where land with entitlements has been gifted or inherited which is often the case in farming businesses. Those who have been gifted or inherited entitlements should first check the legal documentation, and if the value of the entitlements is not clear, then the entitlement values should be obtained from publications, agents or valuers.
Capital gains made from the sale of other capital assets, up to the purchase value of your BPS entitlements plus your capital gains tax-free allowance of £6,000 per individual, will be free from capital gains tax. Any remaining gains are then taxed at 10% or 20% depending on your level of income (18% or 28% for residential property). It may be possible to undertake tax planning to reduce capital gains tax and utilise these losses. For example, if a spouse plans on selling a property but they have not held any BPS entitlements, then they could transfer a share of this property to their spouse to utilise losses recorded from a negligible value claim on their BPS entitlements. Transfers between spouses are at no gain or loss. It is worth checking with your accountant in the first instance to see what information they hold regarding your BPS entitlements. They should have a record of any purchased entitlements as part of the intangible asset register.
SARAH CLEAVE Farms & Estates Team sarah.cleave@albertgoodman.co.uk
NOT THE HAPPILY EVER AFTER - HMRC REJECTED A CLAIM FOR BUSINESS PROPERTY RELIEF ON A WEDDING VENUE With the loss of BPS and volatility in the farming sector, Mrs Butler, like many of our own farming clients, looked to diversification as a long-term strategy. A wedding venue
On ‘Relevant business property’, which includes a business or an interest in a business, including a partnership or LLP, and shares in a ‘trading’ company.
there is also the potential to obtain Business Property Relief
Where there is a minimum ownership period of two years; and
(BPR) for Inheritance tax (IHT) purposes.
There is not a binding contract to sell.
Firstly, let’s remind ourselves of the qualifying criteria for
BPR is available at 100% or 50% depending on the ‘relevant property’ and is restricted for ‘excepted assets’ (assets
is an attractive form of diversification, particularly where
BPR. In simple terms, BPR is available:
not used for business purposes throughout the two years immediately prior to the transfer or death). BPR is not available where the business consists ‘wholly or mainly of dealing in securities, stocks and shares, land or buildings or making or holding of investments’. ‘Mainly’ being interpreted as more than 50%. Please note that the Office of Tax Simplification’s (OTS) report proposed to align the BPR trading test with the current Capital Gains Tax (CGT) criteria for holdover and business asset disposal relief (BADR), which would effectively shift the 50% test to an 80:20 trading vs investment requirement. While this has not yet come to fruition, a change in government may result in this being revisited. The ‘wholly or mainly test’ is not an easy test to apply and, while HMRC consider the following, they also look at the business in the round: Income Capital employed Profits Time spent In Mrs Butler’s case, the initial claim for BPR was denied. It was not disputed that the LLP was carrying on a business. The dispute concerned whether, at the date of Mrs Butler’s death, the business activities consisted ‘wholly or mainly of… holding investments’ and were therefore excluded for BPR.
catering business in 2013, they gradually took over the event management, including the food and drinks service. Activities were then all undertaken by the catering business with the invoices to customers by the LLP being for the ‘use of the venue only’, without any additional services.
The business, Tufton Warren Farm LLP, consisted of the following activities:
The Special Commissioner examined all aspects of the business and found that:
1. Farming
A. At no point did Clock Barn provide amenities and services that went significantly beyond the amenities provided in a property held for investment purposes; and
2. Commercial letting; and 3. A wedding venue operated from a barn on the farm, called Clock Barn. It was agreed that the commercial lettings element was investment, and that the farming element was trading. However, HMRC disputed whether the wedding barn was a trading or investment enterprise, and as such whether it was eligible for BPR. If the wedding business was deemed to be wholly or mainly investment, then Tufton Warren Farm LLP as a whole would not qualify for BPR, with the IHT at stake being £1,671,235. The family appealed, stating that the services and facilities provided went far beyond those expected of a property held purely as an investment and were more akin to a full conference venue. While this may have initially been the position when the business was smaller, following the appointment of the
B. While the level of business activity was higher prior to the catering company being appointed in 2013, even so, HMRC considered the business to still be one of holding investments. Accordingly, BPR was denied, and the appeal was dismissed. This case is a harsh lesson and demonstrates that care needs to be taken, particularly where the business evolves or changes, to ensure that BPR will still be available and, if not, that BPR on the whole business can be safeguarded.
KATE HARDY Farms & Estates Team kate.hardy@albertgoodman.co.uk
INCOME TAX PAYMENTS ON ACCOUNT As we are approaching the deadline for payments to HMRC for the balancing payment for 2022/23 and the payments on account for 2023/24, it is worthwhile considering available options. Generally, payments on account must be paid where the liability for the previous year exceeds £1,000. If these payments are not made, HMRC can charge interest for late payment. The interest rate is currently 7.75%, which could lead to large interest charges if the payments are not made. It is possible to reduce the amount due if you think profits will be lower, which could be likely with the recent decrease in milk prices. However, if your profits don’t decrease, you would then have interest due on the late payments which should have been made. It is possible however, to reduce your payments on account with the use of farmers averaging, without having the risk of paying interest if profits don’t fall. This could be the case following a year of bumper farming profits. Farmer’s averaging can reduce your payments on account, so while averaging may not save tax, it can still be beneficial to average to provide a cashflow advantage. This is because payments on account are based on the income taxed in this year, and doesn’t include those profits averaged back to earlier years, see the table below: Tax year
Averaging
No Averaging £
£
Income in year
26,000
50,000
Tax over 5 years
13,500
13,500
Payment on account due - each
1,350
3,750
For ease, the above is based on farming profits this year of £50,000, the total profits of the previous four years being £80,000 and a personal allowance being available of £12,500 in each year. While this shows that there is no overall income tax saving, the cash flow saving is very beneficial. However, please be aware that where this is used, if profits do remain high, this can lead to large tax payments the following year, where payments haven’t been made on account. If you think this could benefit you, please contact us to review your position.
ANDREW WITHERS Farms & Estates Team andrew.withers@albertgoodman.co.uk
THE FINANCIAL IMPACTS OF SLURRY Farmers are facing many different challenges at present, but slurry storage is becoming an increasing concern for many farmers. Slurry is relentless and the situation has been worsened by the increased rainfall. With increasing legislative requirements, it is a time to seriously consider your storage needs and the potential financial implications of meeting the new regulations. For those that already utilise their slurry well, slurry storage may cost circa £150K+ but will not increase the profitability of the business. Therefore, the repayments will need to be found from the current cash flow. However, thinking about the tax perspective, slurry storage can be a qualifying expenditure for capital allowances, like a new tractor would be. Therefore, the total cost of the new slurry infrastructure may reduce your taxable profits, in turn reducing your tax liability. Assuming you are eligible for capital allowances and have a tax liability or have had a tax liability from farming profits in the last five years, hopefully there will be at least one cost saving - and which may enable you to reclaim some tax. For other farmers, who have previously not fully utilised their slurry as a resource, the focus on slurry utilisation may encourage better use - maximising output with less purchased inputs such as fertiliser. These farmers will still have the need to repay the investment but with a reduced tax liability and a reduction in inputs, they may find it a little easier. SOME CONSIDERATIONS ARE DETAILED BELOW: The life of the project – look to match the finance to the life of the slurry storage. Don’t strangle the business to cover the investment. Consider how it will be financed at an early stage and involve your bank manager. Who are you doing it for? With any large investment, consider who it will benefit. If this is the next generation, do they agree that it is the way forward? For some it has been the tough conversations that have led to a complete change in direction. Understand the legal requirements – requests made by the Environment Agency (EA) may exceed the legal
standards which you need so make an informed decision about the work you will undertake. Tax planning - work with your accountant to understand the tax implications and use the opportunity to maximise this, particularly if the work will be done near 31st March 2024 year end. Seek professional advice – always use specialists to assist you, whether that be for planning permission or with regards to EA correspondence or disputes All farmers we meet care about the environment and want to do the right thing, but with any business they need to understand the financial implications. As accountants we love to save people tax and therefore if we can take the current slurry situation and use it to save some tax or even get some tax back, then this will make us, and hopefully our clients, very happy. If you would like to discuss your position or be pointed in the direction of other professionals who can help, then please do get in touch.
KATE BELL Farms & Estates Team kate.bell@albertgoodman.co.uk
TAX YEAR END PLANNING As we start the new year, there are still a few months left to consider some year-end tax planning. With the change to basis periods, this will be more important for those who do not have a year end that is 31 March or 5 April, as you will need to decide to whether to change your yearend or not. Where your year end is not 31 March/5 April, you will have more than 12 months trading profits, so you will need to ensure tax planning is made before the end of the tax year. While quite a lot of farming enterprises are seeing substantially lower profits in the 2023/24 tax year, tax planning can still reduce tax. Should repairs or capital allowance expenditure be brought forward, to further reduce profits, or even create losses, this can then enable savings to be made on the high farming profits from the previous tax year. Where income will remain high, you may wish to consider taking advantage of making payments into a pension scheme. If you have enough ‘relevant earnings’ you are now entitled to make a pension contribution of up to £60,000 per annum. Pension contributions extend the basic rate bands and can save income tax - They can also enable you to retain your child benefits. Charitable donations will also extend the basic rate band, so if you are a higher rate taxpayer and have made donations, make sure you keep a record of these to reduce potential tax liabilities. The changes in National Insurance will also lead to slight savings where expenses are brought forward. Where the business is a partnership or sole trader, by bringing expenses forward, this could give rise to a 1% saving! While
there are benefits in bringing costs forward, you clearly need to have the cash in the first place and expenditure shouldn’t be incurred just to get a tax saving! Remember, you still have to spend it to save it! Where you trade through a limited company, you may wish to consider issuing dividends before the year end. The dividend allowance will decrease from £1,000 to £500 per annum. You may also wish to consider paying yourself interest if you have loaned your company money. Where you can pay interest, this could be tax free in your own hands and save the company tax up to 26.5%. Looking at capital gains tax, there are a few things to be aware of. As mentioned earlier, you may have a capital loss to claim in the year (see article on Basic Payment Scheme). Where you have other assets to dispose of, at a gain, you should consider timing of sale. Where you have losses, these can be offset against gains, and can result in the wasting of the annual exemptions. From 6 April 2024, the annual exemption will decrease to £3,000, so you will need to consider timing of asset disposals. Most reliefs are on a ‘use it or lose it’ basis, so it is advisable to take action before 5 April to benefit from the savings. If any of the above is of interest, please do get in touch.
ANDREW WITHERS Farms & Estates Team andrew.withers@albertgoodman.co.uk
XERO TOP TIPS
- HIRE PURCHASE AGREEMENTS A common query I receive is how to enter hire purchase transactions as there are a couple of ways around it and often include added complications of part exchanges. Usually the deposit paid will cover the VAT liability (or net VAT) reclaimable and sometimes includes the signing fee. In the example below, we have a John Deere tractor purchased for £100,000 and an older one part exchanged for £50,000. This leaves the balance financed of £50,000. There is a signing fee of £100, an option to purchase fee of £70 and total interest payable of £4,000. There are 36 monthly repayments of £1,500.
We therefore lay the bill out as follows: The new tractor is posted to our additions code with input VAT charged on this. The part exchanged tractor is then a negative line going to the disposals code with output VAT charged on this. There is then the balance financed line which is also negative and goes to the hire purchase loan account with No VAT selected. The signing fee is expensed to the profit and loss account hire purchase charges with No VAT on this (unless specified otherwise).
This provides the net amount payable of £10,100, being the cash deposit (which equals the net VAT above) plus the signing fee, which should then agree to the payment made on the bank reconciliation screen. Going forwards, the £1,500 monthly repayments need to be reconciled with No VAT to the Hire Purchase loan account. As there is interest included in these repayments, this element can either be left for us to split out when completing the year end accounts or this can be split on a straight-line basis on each repayment by you (tip - you could even set up a bank rule for this!).
CAPITAL ALLOWANCES Plant, machinery and motor vehicles provide you with tax relief via capital allowances (calculated as part of your taxable profits). HMRC states that to be qualifying expenditure for capital allowances purposes, the asset must be owned. However, assets bought under hire purchase are not owned until the final payment is made (usually with a nominal amount called the option to purchase fee). This has been recognised by HMRC and so you are therefore considered to be the owner as soon as soon as the asset is brought into use – not just when it is brought into the yard. This is therefore important to take into consideration for tax planning purposes as lead times are still significantly longer than a few years ago to get assets on farm.
In addition, it’s important to note that this isn’t just when it’s in the yard. For example, if you bought a new combine now and took delivery of it in February but you’re a March year end, then it would be difficult to argue it has been used in the trade before your year end and so the capital allowances can’t be claimed on the full amount in that year.
EXTRA TIP Why not add a picture/ PDF of the hire purchase agreement to this transaction? To do this click on the paper icon Other items that you wish to attach generally in Xero that aren’t specific to a particular transaction (such as bank or loan statements) can be uploaded by clicking on the entity name in the top left and then selecting Files.
CHARLIE GREEN Farms & Estates Team charlie.green@albertgoodman.co.uk
INHERITANCE TAX – HERE TO STAY OR GONE TOMORROW? There has been a huge amount of speculation in the press regarding the future of inheritance tax (IHT) under a new government, whether Conservative or Labour. The Conservatives wishing to appeal to their voters with speculation they may remove IHT all together and the Labour party who would like to tackle the avoidance of IHT. Alongside this we have a backdrop of numerous reports from various parties including the Office for Tax simplification (OTS), the All Partly Parliamentary Group (APPG), the Rock Review and most recently the Institute for Fiscal Studies (IFS). These reports have suggested changes to IHT rather than the complete removal of it. The proposals included: To make it harder for diversified businesses to qualify for business property relief, requiring an 80% trading test rather than 50%. (OTS) To simplify the IHT treatment of gifts. (OTS and APPG) To remove the capital gains tax (CGT) uplift on death, particularly where a relief or exemption from IHT applies. (OTS and APPG) To reduce the amount of IHT reliefs available, perhaps scrapping agricultural and business property reliefs (APR & BPR) and at the same time reduce the rate of IHT. (APPG) To restrict APR for landlords to land let for a minimum term of 8 years. (The Rock Review). To charge un-used pension funds. (APPG) IHT, the tax paid on the value of assets left on death, in its current form was introduced in 1986 with the concept of protecting poorer members of society by redistributing wealth from inherited legacies. The rational for the two main reliefs from IHT, for businesses and farms – APR and BPR, being to remove the need to sell and break up businesses or farms to finance IHT liabilities, protecting food production and security, entrepreneurship, and the economy. However, one of the unintended consequences of the reliefs is the perceived ‘avoidance’ of IHT where wealthy individuals invest in land and businesses qualifying for APR and BPR. Many believe that this contributes to land values being so high compared to production value.
SO WHAT CHANGES MIGHT WE SEE? With a Labour government we could see a hardening of the rules for IHT, in particular, in my view, the three most likely changes might be: 1. The removal of the CGT uplift on death, particularly where IHT relief is claimed. This would result in CGT payable on assets sold after death where IHT relief was claimed on death. 2. Changing the BPR mainly test To qualify for BPR under the current rules the business must be mainly trading which is a more than 50% trading test. For CGT purposes the test is a substantially test, more than 80% trading. It has been suggested the rules should be aligned. If the BPR legislation changed to a substantially test, this would result in many farming and more likely estate businesses no longer qualifying for BPR due to the extent of investment activities in the business. Most farm businesses have some form of investment activities such as the letting of property. Landowners should consider the impact of this potential change and consider their future business structure to protect relief or potentially bank relief whilst the property qualifies. 3. Changes to APR and BPR to reduce avoidance. This might be to take on the recommendation of Baroness Rock so that APR only applies to landlords where land is let for a minimum term of 8 years. Labour could extend this principal to owner occupied farmland allowing APR only to those who have been farming for a certain period or have an historical association to farming. They might also tackle contract farming and share farming arrangements to ensure only ‘genuine’ farmers receive relief. It should be noted that, when answering questions from the CLA President Victoria Vyvyan at the CLA conference in December, Steve Reed, The Shadow Secretary of State for Environment, Food and Rural Affairs, ruled out the Labour party removing APR.
REMOVAL OF IHT The next budget is expected on 6 March and there have been reports that our Chancellor, Jeremy Hunt, might scrap IHT under pressure from Tory MPs to announce tax cuts to boost chances of victory at the election. Only 4% of estates pay IHT so there could be backlash that any cut only benefits the wealthiest. However, it would not be completely unprecedented as many other countries have abolished their equivalent of IHT. Whilst IHT is not a huge contributor to the public purse, it has raised £4.6bn in the tax year to October 2023 so far, therefore if IHT were abolished how would the lost revenue be recovered? Further there would be other consequences of scrapping of IHT such as how gifts in lifetime would be dealt with, whether these would become chargeable to CGT, without holdover relief, which may prevent lifetime giving of assets, and whether the CGT uplift on death would cease to apply, as well as the impact on trusts. So whilst at first sight the removal of IHT might seem attractive there would likely be less attractive ramifications to its scrapping, particularly given currently most agricultural estates qualify for relief from IHT and planning can be undertaken to minimise it.
RETAINING IHT AND SIMPLIFICATION PLEASE The most complex, and potentially unfair, area of the IHT legislation and where the most misunderstanding arises is the operation of the rules on the residence nil rate band (RNRB). For a married couple who qualify for the latter, they could leave up to £1M of assets with no IHT liability. However, the qualifying criteria results in many individuals not benefiting from the relief and the rules are complex. This is an area which should be simplified. The current nil rate band (NRB), the amount up to which an estate has no IHT liability, is £325K per individual and has not been increased since 6 April 2009. If the NRB increased with inflation it would currently stand at around £500K. Therefore, the legislation would be hugely simplified, and fairer, if the RNRB were removed and replaced with a NRB of at least £500K per individual.
The other area of huge uncertainty for landowners is whether relief would continue to apply on land taken out of agricultural occupation and put to environment use. Clarity is required on this if government wish to achieve their environment targets and encourage environmental land use. We are still waiting for feedback following the call for evidence. Finally, the CLA have long lobbied for recognition of the ‘single business unit’ acknowledging that farming and land use has changed over the years. A commercial rural business now often involves several enterprises, one of which might be deemed investment for tax purposes but is an important part of the overall commercial rural business. Recognising a single business unit, with one set of tax rules, would simplify the accounting and tax treatment of the various enterprises and would reduce the economic cost of running the business as well as promote investment in the rural business.
CONCLUSION My initial reaction is that scrapping of IHT may be a step too far for the Conservatives. There may be bigger wins for them by reducing the VAT rate (and may be registration threshold) and increasing the income basic rate band - the level at which higher rates of income tax is paid, as well as the threshold at which child benefit is removed and IHT is paid, as discussed above. Meanwhile, the threat of a Labour government does bring some uncertainty over the future of reliefs from IHT and landowners should consider the impact of potential changes on their own position and consider planning in advance of the election.
SAM KIRKHAM Farms & Estates Team sam.kirkham@albertgoodman.co.uk
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