Will the Future of Farming Review help new entrants?

I have read with interest the Future of Farming Review and, as you might expect, the section on Taxation and Tenancies. There are a few key suggestions on tax which I find a little troubling.

There are three main recommendations about tax;

1.    Remove the difference in tax rates between companies and individuals.

2.    Restrict Agricultural Property Relief (APR) to working farmers under 70.

3.    Extend Entrepreneurs Relief to let farmland.

I am not sure these will have the desired effect that the Review wishes. I have explained my reasoning below.

1.    Tax equalisation

It is hard to see the government either increasing corporate tax rates, expected to fall to 20% from April 2015 or decreasing personal tax rates currently between 0% and 62%. The government’s recent consultation on mixed partnerships also suggests that they are not minded to go down this route, wanting to remove the hybrid structure that currently gives businesses the best of both worlds.

Even small businesses such as window cleaners and bookkeepers have incorporated to reduce their tax burden. Like any decision the extra costs and compliance obligations of incorporation need to weighed up against the benefits, just like any other business decision. For some the drawbacks of incorporation, such as the possible loss of 100% Business Property Relief (BPR) on development land, might be too costly. But everyone has a choice of structures, some are simply better suited to an individual’s circumstances than others.

Would a simpler solution be to alter tenancy law to allow landlords to let companies share occupation with tenants without the risk of the company establishing a tenancy, or without the tenant losing succession rights? This shouldn't be an issue with Farm Business Tenancies.

2. Restricting APR to those under 70

The suggestion that restricting APR to those aged 70 or less on land farmed in hand, but maintaining its availability to any age if let, seems a bit strange.

As the Review pointed out BPR would be available on land but not farmhouses, what isn't mentioned is that BPR is only available at 100% where it is an asset in your trading business, i.e. farmland held as a partnership asset. If however the land is held outside the partnership and let on an FBT it would still attract 100% APR but only 50% BPR.

Given that BPR is available on pretty much everything bar the farmhouse on a working farm, will this make any difference? One of the attractions of holding farms till death is the valuable Capital Gains Tax uplift to market value that is sheltered by the IHT reliefs. This will still be available so unless farmers have valuable farmhouses will this make any difference?

Will it encourage farmers to let the farm or simply sell up, the latter generally acknowledged as being a bar to new entrants?

3. Making let land qualify for Entrepreneurs Relief.

This in my mind seems the most ill-conceived idea!

One of the downsides to owning land as a landlord is that any gains are likely to be taxed at the highest Capital Gains Tax rates. Gains however are eliminated with an uplift to market value on death as long as IHT reliefs are available to prevent an IHT charge.

This uplift effectively reduces the Capital Gains Tax rate to 0% which makes the holding of land until death very valuable. So owning let agricultural land is an ideal investment for passing wealth to the next generation.

Reducing the existing tax rate on sales of let property will only make it a much more short term investment, if I can buy land let for a year and sell at a gain why wont I? Surely the existing rules, that already give a CGT uplift on death, encourage longer term holdings and are more likely to encourage longer term letting?

More speculative investment in land driven by tax changes will only shorten tenancies and push up land prices, both of which will hamper new entrants.

These are obviously just my thoughts but tinkering with some of these issues might result in unintended circumstances, many non farmers, including some of my work colleagues think that there are too many tax reliefs for farming. Will the industry’s drive to encourage succession lead to tax changes that are detrimental to the majority?

You can follow me on twitter @Rob__Hitch

Will Farmers be the losers from today's budget?

The fallout from George Osborne's budget today seems to me mostly favourable. Headline  cuts to Corporation Tax and the raising of the Personal Allowance to £10,000 next year have won plaudits, not too mention the CUT in beer duty!

But also announced by the chancellor was a raft of anti avoidance measures. Two items that haven't received many headlines may have a significant impact upon the affairs of farmers.

IHT Changes

The first is the introduction of legislation to prevent the claiming of IHT relief on some loans. Whilst this appears a sensible approach on closer reading of the proposed rules http://www.hmrc.gov.uk/budget2013/tiin-2006.pdf shows that these rules will also impact on those with loans to buy assets that qualify for IHT reliefs such as Agricultural Property Relief (APR) and Business Property Relief.

It seems that HMRC are looking to set any loans against the asset for which they were taken. This differs from the current legislation that sets loans against the assets that they are secured against.

In recent years this has led to many farmers with debt to secure their loans on property that doesn't qualify for IHT reliefs. So whilst a farmer might borrow money to buy land they would secure the loan against a let house or valuable farmhouse to reduce the value of any chargeable assets on death.

The proposed legislation, drafts will be released next Thursday, suggests that this treatment will no longer be appropriate exposing many assets to IHT. No doubt HMRC will be looking at the purpose for which loans are taken out rather than what they are secured on.

Partnership profit shares

The other issue raised today was the announcement of consultation into the sharing of profits in partnerships.

In recent years partnerships, in which you can share profits as partners agree, have proved very flexible for families minimising their tax burden. Whether this has been by allocating profits to a corporate partner or an elderly partner to avoid National Insurance, significant tax savings have been achieved.

This has been even more evident with Tax Credits as young families have restricted profits to claim tax credits and elderly/company partners have shared profits and paid reduced rates of tax.

This is particularly prevalent in family businesses owned by several generations, which farming businesses almost always are. 

We will await the consultation document with interest as it might provide one of the biggest changes to the taxation of farm businesses for many years. Coupled with the IHT changes announced I can't help feeling that this wasn't the best budget for farmers. 

Update - Loans to Participators

The anti avoidance introduced for loans to participators might also have a big impact on corporate partners, not just in the farming world. 

As a firm we have always taken a cautious view of corporate partners but some people have introduced them to partnerships, and allocated them all the profits. Over time the company capital account in the partnership increases with the individuals capital accounts reducing and sooner or later becoming overdrawn.

New legislation will treat these overdrawn capital accounts as an overdrawn directors loan, giving rise to a 25% S455 tax charge. This should be repayable but already there is speculation that this repayment might end giving rise to a permanent tax charge. 

You can find out more about today's budget on Dodd & Co's website or email me or contact me on twitter if you have any questions. 

Inheritance tax looms for holiday cottages

So the long awaited decision from the Upper Tier Tax Tribunal has been released in the NMRC v Executors of Pawson.

HMRC sought to deny Business Property Relief on a holiday cottage. At the First Tier Tribunal ruling the decision went in the taxpayers favour, with the tribunal ruling there was sufficient activity to make the holiday letting a business. 

HMRC were given leave to appeal on the grounds that the FTT had erred on the basis that;

It formulated and applied the wrong test in assessing whether the Property was held wholly or mainly as an investment. 

Needless to day HMRC won the appeal, details can be found here. HMRC v 1 Lockyer 2 Robertson for Nicolette Pawson

What does this mean for holiday cottages? 

The obvious answer is no inheritance tax relief. For many farmers however Business Property Relief may be available if the holiday cottage is part of a mainly trading business, i.e. a farm. In most cases holiday cottages, like bed and breakfast facilities, have been moved outside the farm business in order to avoid VAT registration. 

So to attract Inhertiance Tax relief will farmers and others have to give up the benefit of not being registered for VAT, effectively increasing the price of their property?

More information will be posted on http://www.doddaccountants.co.uk/ on Monday

You can follow Rob on twitter  @Rob__Hitch