Are tax rises on the way to help pay for the Covid pandemic?

Inheritance Tax

We were expecting an announcement in the March 2020 Budget on Inheritance Tax (IHT) as to whether any of the recommendations from the Office of Tax Simplification (OTS) from their 2019 report are to be implemented. Most of these were minor changes but there were a couple that would potentially have a bigger impact:

n A person inheriting agricultural or business assets would no longer get them rebased to current market value for Capital Gains Tax (CGT) purposes. This has traditionally been a disincentive for farmers to make lifetime gifts. This is the most likely IHT change, and will encourage earlier gifting in future.

n Business Property Relief (BPR), which in most cases gives 100% exemption from IHT, is available where most of a business consists of trading activity. Diversified activities such as cottage rental, holiday letting, land rental, etc. mean that part of a business is classed as the holding of investments. The OTS suggested that in future a business would need to be more than 80 percent trading activities rather than the current 51% in order to qualify for BPR.

There is speculation leading up to most Budgets that Agricultural Property Relief (APR) could be restricted or even abolished. We do not think that APR will be abolished but some restrictions could be introduced:

n Perhaps an upper limit, either in terms of acres of land or value could be introduced?

n Many years ago there was a “working farmer” test for APR. This meant that only someone who got most of their income from agriculture qualified for APR. Whilst this may deter non-farmers from purchasing farmland to save IHT, there is a risk that diversified businesses could fail this test if it were introduced.

Capital Gains Tax

The Chancellor asked the OTS to produce a report on CGT back in July. This is largely looking at whether the reliefs and exemptions work as intended, rather than whether rates should be increased. It is not clear if they will have completed their report in time for changes to be introduced in The Budget. At first glance the top rate of CGT on sale of land at 20 percent looks quite generous compared to both current Income Tax rates of 40 percent, and historic rates of CGT. Previously though tax was paid on a gain after inflation was deducted. Thus 40 percent CGT was sometimes paid on the sale of land, but on much lower gains. Most land is held for many years or decades so will make large gains if sold. This will become a greater issue if, as discussed above, inherited land is not revalued when the owner dies.

Wealth Tax

I will briefly mention this subject, even though I don’t think anything will be introduced any time soon. Some countries have an annual wealth tax and this has been suggested by some as a way of the UK paying for the cost of the pandemic.

A wealth tax has been suggested in the past as a replacement for one or both Capital CGT and IHT, rather than in addition to them. The payment of both IHT and Wealth Tax on the same assets does smack of double taxation.

We have no details as to whether agricultural or business assets would be exempt from a Wealth Tax, or what rate of tax would be charged. The administrative burden of having to get regular valuations of assets would also be an issue. None of the main political parties are actively favouring a Wealth Tax at present.

Pensions

The cost of Income Tax and National Insurance relief on pension contributions is reported as being in the region of £40 billion per year. Thus some restriction in pension tax relief could raise more significant amounts of money than IHT or CGT. In particular, higher rate tax relief on contributions looks particularly vulnerable, so anyone in this position should consider making contributions before the Budget.

For more information about how these tax changes may impact your farming business, call Andrew on 01228 690200 or email andrew.robinson@armstrongwatson.co.uk