Both farmers and country landowners are exceptionally vulnerable to capital taxation. However, there is also an economic as well as a political vulnerability. There is of course increased uncertainty post-Brexit, whilst the UK formulates a deal to leave the EU. Farmers hold their capital in relatively illiquid assets: land, buildings, stocks, plant, crops etc, and in order to pay capital taxation they are obliged to realise assets and convert them into cash. This conversion may trigger off a second tax, capital gains tax (CGT), and in any case, farms and farmlands are not usually capable of partial realisation, to pay capital taxation representing a percentage of their total value (though the exception may be the sale of redundant assets, for example cottages and farm buildings).
Again, substantial arguments can be mounted in favour of capital taxation on death. The argument here falls into two parts: there are those who argue that what an heir receives should be more severely taxed because it comes to him as ‘bounty’, and therefore his acceptance of taxation will be readier. Second, it is sometimes contended that inheritance has a greater capacity for taxation because it is value which has not been earned by the recipient personally but by his forebears at some distant time in the past.
Whatever the merits of these arguments, they have encouraged capital based taxation which could have been severely damaging to farms and farmlands had it not been for the fact that it has brought with it a range of reliefs. Generally, these reliefs operate by reducing the taxable capital base by some percentage of value or, alternatively, allowing a period of time during which capital taxes may be paid by instalments.
Both IHT and CGT are notoriously imperfect. Recent years have seen very aggressive attacks by HMRC on the eligibility for the reliefs which ironically seems to be favouring the ‘healthy and the well advised’ ie those who are well enough still to occupy the land and who can afford to pay for the specialist professional advice with correctly prepared accounts and properly drafted legal documentation.
Agriculture is an industry whose profitability is largely determined by external factors, including national and international pricing mechanisms and markets, as well as the weather and animal disease. In recent years, the profitability of farming has fluctuated as a consequence of many such factors, including: major reform to the Common Agricultural Policy (CAP); world food shortages; variations in the exchange rates between the pound sterling and the euro; increasing protectionism in some world food markets; the increasing concentration of selling power for supplies, such as fertilisers and machinery; the dominance of a few large food processors and retail supermarkets and the greater attention paid to environmental land management. The Brexit decision in 2016 has added further uncertainty to farming and the BPS payment is only guaranteed until 2021 which is not that far away. Whereas income taxes had diminished in importance more or less proportionately with the diminution of incomes, capital taxes have not. The price of farmland has seen dramatic rises in the past decade which can create substantial capital taxation liabilities on sales or on a death. In addition, for many years, the values of residential and commercial property on farms have increased disproportionately and are similarly ‘pregnant’ with significant capital taxation liabilities on sale or on death. Thus, potential capital taxation remains an important consideration and emphasises the necessity of taking full advantage of reliefs such as entrepreneurs’ relief (reducing the effective rate of CGT to 10%) and 100% reliefs from inheritance tax for agricultural (APR) and business property (BPR).
The impact of capital taxation over several generations has made many farmers and landowners aware of the need to plan the transfer of their businesses and holdings to their children. With care and forward planning much can be done to mitigate or even remove capital taxation from inter-generational transfers. Often simple structures can prove just as effective as more elaborate ones in this process. Indeed, highly complex planning has its own dangers: sometimes the goalposts are moved and the most intricate of plans have to be undone. An example is the introduction of the pre-owned assets charge from 6 April 2005, to counter perceived unacceptable inheritance tax avoidance.
Further threats have come with the replacement of stamp duty by stamp duty land tax (SDLT) on 1 December 2003 which has resulted in much higher levels of tax being generated than by its predecessor. The additional level of SDLT rates introduced from 1 April 2016 present additional costs for both farmers and landowners looking to purchase additional residential property for farm or estate workers. SDLT may prove to be the equal of capital taxation as a threat to farmers and landowners in the twenty-first century.
Agriculture Bill – the tax impact
The Government has recently published its Agriculture Bill as a crucial part of their planning for future farming and land management policy. The Bill creates a framework and confers power for new agricultural policies and transition measures for England, Wales and Northern Ireland. This is a move away from direct agricultural support to the provision of a wider range of public goods, as listed below. The BPS is due to be phased out in 2021 with a transition period between 2021 and 2027.
The Bill provides the powers to make payments for a range of public goods which may form part of a future Environmental Land Management Contract. The range of public goods the English government envisages delivering extend beyond the environment to animal welfare and land access, including the following:
- managing land and/or water in a way that protects or improves the environment;
- supporting public access to and enjoyment of the countryside, farmland or woodland and better understanding of the environment;
- managing land or water in a way that maintains, restores or enhances cultural heritage or national heritage;
- preventing, reducing or protecting the land from environmental hazards;
- protecting or improving the health or welfare of livestock and plants.
In addition, there is provision for funding improvements in farming productivity which will replace the current Rural Development Programmes.
It is
difficult to see how the Bill will reduce “red tape” for farmers in general
terms. By definition, the goals appear to attract more farm administration, not
less. It is therefore important that business plans and cash flows are
prepared, setting out the survival strategy for each farming enterprise once
more information becomes available. The tax impact of all the current changes
and ideas must be incorporated into decision making.[1]
[1] Reproduced from Tolleys