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Speaker
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Transcript
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Tim Williams, Partner
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[Music] Hello and welcome back to another episode of the Death & Taxes - and everything in between podcast. A weekly podcast by the Private Wealth team at Burges Salmon. I'm Tim Williams, and today I'm joined by my colleague Tom Hewitt to discuss the impact of the Budget on land owners and farmers.
[Music] Hello Tom, thank you very much for joining us today.
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Tom Hewitt, Partner
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A pleasure Tim.
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Tim
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Today we're going to talk about the impact of the Budget for farmers and land owners and this has been something that's been a lot of press about over the last couple of weeks. Lots of outcry within the industry, which we'll come on to talk about why people are finding this such a big change and where the controversies lie.
But Tom, could you, for the benefit of listeners who haven't heard our previous podcast where we've touched on the detail of these changes, just run us through what has been suggested in the new Budget and what we know, and maybe a bit of what we don't know as well?
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Tom
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Of course, so the changes at face value are deceptively simple. What's being introduced from April 2026 is a million pound allowance for each individual taxpayer to cover APR and BPR assets which formerly would have qualified for 100% APR and BPR.
So in a sense you're tapped at a million each for your 100% APR/BPR assets and any beyond that will be subject to relief at 50%. So effective rate of tax 20% and so that's why many of the headlines are saying that in large part for farmers and land owners with assets of any great value there's going to be a 20% charge to tax on assets or wealth above a million pounds.
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Tim
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And that does all sound, as you say, very simple when you say it like that but actually there are quite a few nuances in there aren't there? And part of that looks back to how the rules work at the moment and what gets relief at 100%, what only gets relief at 50%, and how those assets work through the allowances. But there are also interactions with some of the other reliefs available aren't there?
I mean there's the what isn't changing is the nil-rate band amount still at £325,000.
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Tom
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Correct.
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Tim
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And the resident nil-rate band amount which is the £175,000 top up. But there's been a lot of talk about how those will work to potentially leave land owners with a, what might to some people seem like a lot of money but in farming terms quite a relatively modest farm, within the ambit of basically full relief. And could you just explain how that works?
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Tom
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So I think the government probably were quite surprised by the concern expressed by many farmers and land owners and one of the arguments put out since the Budget is that many farming families, where there's a couple, will benefit from a total set of IHT reliefs of £3 million, and what that's made up of is a million pound each for husband and wife, of the million pound allowance that's being introduced, two lots of IHT nil-rate ban the the conventional £385,000 each and then two lots as well of the residence nil-rate band.
Now as any accountants or lawyers listening will know, residence nil-rate band is a horribly complicated relief which was introduced so that some taxpayers, at least, could say that they've got a million pound allowance across a couple. However, it is capped. It's only available if your assets are worth less than 2.35 million and for many farming families, that sounds a lot but it really isn't if you're a farmer with an acreage or assets of any size at all, and also it's rarely going to be available on the first death and although it rolls over to the second death, because of that aggregation on the second death are likely to be assets worth more than 2.35 million, it may not be available at all on the second death.
So it is a simplification to say that many will have a 3 million pound allowance, it's certainly true that some will but it's probably few in practice will be able to take advantage of that full set of reliefs.
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Tim
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And the obvious examples there Tom are, you know, farmers who are already widows or widowers who won't have benefit of transferable allowances. And it's also worth saying, isn't it, that the million pound allowance at the moment, or in the current proposals rather, unlike say the nil-rate band or the resident nil-rate band is not going to automatically roll over. The suggestion at the moment is it will be a use it or lose it type relief, so you're right that it may be possible for people to sort of accumulate up to 3 million pounds of value, but actually that does require some careful structuring to make sure that the reliefs are actually properly used if they're there at all, and all of these things, as you say, the devils in the detail and they are quite complicated to track through.
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Tom
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No that's absolutely right and and I think it's worth putting in a a slight caveat to all of this, is that we don't yet have the draft legislation what we've got is what's described as a policy statement which is really very light on detail in many areas. It doesn't suggest that the million pound allowance will be capable of being transferred to a surviving spouse, as you say Tim, but I don't think one can say with certainty that is going to be the position. It would seem pretty logical to me to be consistent with the other allowances that it should be, but we haven't been told that yet. But to say categorically it's not going to be, I think is probably overstating the the position at the moment.
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Tim
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So with that broad overview in mind, Tom you know, as I said at the beginning. This has garnered lots of press interest and lots of anger within the industry, I think it's fair to say. Why are farmers in particular so upset about these changes?
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Tom
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Well, a number of reasons Tim. I think first of all is the context, farming's been through a lot of changes in the last three or four years post-Brexit and they're still bedding down and that's affecting an awful lot of farms and their profitability. Connected to that is the fact that although most, or many, farmers are asset rich in terms of the land and stock that they may own, they produce typically very modest returns on that Capital, the actual income or profit each year is proportionately very small and so adding charges like this to a farming business may create a real funding headache, to say the least, and many suspect that it'll require the sale of land. And if you're already quite a small family farm that may mean that you have to sell the whole farm because it's unsustainable to be left with a much smaller acreage.
And what's interesting I think is that it's unified at all levels of land land owner, at the one end you've got the the Tenant Farmers Association expressing concerns about this, through the NFU, through the CLA, right up to Historic Houses, where their AGM was early this week and many were expressing very great concern about what this may mean to their operations as well. So there is a real worry about this.
Coupled to all of that of course is that the then Shadow Secretary of State for DEFRA did confirm a year ago that there wouldn't be any changes to APR. Now clearly things change and they have changed but I think many in the industry felt that there was assurance that this wasn't going to happen.
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Tim
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And it comes in the context of other comments from government, or from the opposition as it were at the time, over the last sort of several years hasn't it, in support of UK agriculture, that I can see why people are very frustrated by the this apparent shift in policy.
I suppose it's worth saying just on your funding point, Tom, that there is an opportunity to pay over 10 years for some of these charges, that's still going to be quite a lot of money to find for businesses every year, and whilst there is - at the moment there is an exemption from interest running on instalment payments where you have relievable property, which is in some ways relatively unusual at the moment because we don't tend to see that many clients with chargeable property that doesn't qualify in full relief. But that's not been expressly covered in the draft policy, as you say, so hopefully that will be included in the legislation when it comes through, or when changed rather, but it remains to be seen.
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Tom
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Yes and I suppose, I mean the real challenge is that a 20% charge, even if you're only paying 2% a year over 10 years, that can still translate to a very significant sum which if you're trying to pay it out of income may be unachievable. Of course coupled to increasing employers National Insurance and minimum wage and so on. So other factors there are also putting farmers profits, as well as many other businesses, under pressure.
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Tim
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And it's a good point actually Tom, is that we're talking about farmers primarily here, but lots of the land businesses that we deal with won't just have farming interests, or they might have other businesses on their land. They might have holiday lets, which of course the benefits, or the beneficial Capital Gains Tax treatment of holiday lets is ending from April 2025.
So a shift there for businesses, as well, as you say, the sort of the wider reaching employment taxes and minimum wage impacts that are affecting all businesses.
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Tom
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Yes and I suppose so many diversified farm businesses and estates have, in the last 10 years, focused on creating so-called BALFA type businesses, where there is at its heart a trade, very often an in-hand farm but around that clustered investment activities such as letting cottages or commercial units, that sort of thing. And provided it's been mainly a trading activity then they could be confident of getting 100% BPR.
Now if you're looking at the new rules and thinking well my million pound allowance really isn't going to touch the sides on this BALFA for planning really becomes less attractive, still has some attractions, but in large part you may be looking at it thinking well I'm only going to get 50% relief not 100, this is what used to get because I've already used my million pound allowance.
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Tim
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And exactly, and I suppose what hasn't changed so far is the rules around how the BALFA planning works, which listeners will probably know the rules require you to be predominantly trading. Which at the moment means just over 50% trading, and there was discussion in the previous few years, not just in the build up to the Budget, that those rules might become more restricted to mean a higher threshold, say 80% trading, as it is for Capital Gains Tax and that hasn't changed. So for those businesses who do have a BALFA structure in place they're playing on the same rules in that regard, but exactly as you say Tom, the issue that they will have is whether the structure is still worth maintaining for the benefit of a lower relief, because obviously having all your you know eggs in one structure, one basket, brings potential problems of its own.
So there may be people looking to review their BALFA structures for, you know, operational ease or succession reasons that we can come on to.
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Tom
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I agree and I suppose in a similar vein Tim, something that people have been doing for over 20 years on land owners with with tenants is very often looking to restructure the tenants through surrenders and regrants in order to get post-1995 tenancies, so that the landlord could get 100% APR.
And again there, if as a landlord/land owner you've already essentially, notionally used up your million pound allowance, you know where that's going to be applied, the incentive to update your old pre-1995 tenancies is really gone, because the maximum rate of relief will be 50% whether you've updated the tenancy or not.
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Tim
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And that property that's already qualifying for 50% as you say won't affect your million pound allowance either, so actually you can keep property, there less on an old style AHA tendency, but not trouble your 1 million pound allowance, as it's being called.
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Tom
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Quite.
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Tim
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So obviously people have got to look very carefully at the structures they've got and how they might fare in the new landscape, but what opportunities are there out there for land owners and farmers to do things before the 5th April 2026 when all this comes in?
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Tom
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Well there are certainly opportunities, but what opportunities are suitable to an individual depend very much on their circumstances. The first thing I think to think about is if you're husband and wife couple and the other doesn't actually own any APR/BPR assets then it's certainly worth looking at sharing some APR/BPR assets with your spouse, to make sure he or she is able to use their own million pound allowance when the time comes.
The next thing to bear in mind is if you make gifts either outright to individuals or to a trust and die, and you make those gifts now essentially or before April '26, if you live for seven years then you'll be within the current rules, the uncapped rules without the million pound allowance.
Similarly, if you make gifts now but die before April '26 you'll be within the old regime. The danger zone is if you make gifts now and die between April 2026 and the 7th anniversary of the gift because if that happens you're going to be within the new rules with the cap applying. And that risk is difficult to quantify, but clearly it's a greater risk the older you are and query whether insurance products will be available to help buy some protection against that exposure.
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Tim
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Similarly, if you make gifts now but die before April '26 you'll be within the old regime. The danger zone is if you make gifts now and die between April 2026 and the 7th anniversary of the gift because if that happens you're going to be within the new rules with the cap applying. And that risk is difficult to quantify, but clearly it's a greater risk the older you are and query whether insurance products will be available to help buy some protection against that exposure.
And that clawback point is very important isn't it, that this is the, sort of, the anti-forestalling rules for IHT. That whilst if you done this on the 29th of October you'd be fully under the old rules, whether or not you've survived beyond 6th April '26, but anything post 30th of October looks to be caught. And as we said earlier on, we don't know the detail of those rules yet but if we look at how it would work now you'd look at the value of the property at the date of the gift to then bring it back into tax on death within seven years. And who knows where we might be with valuations in that period, if business values shift significantly, or land values shift significantly, we might find yourself in a different position than if you'd held on and qualified for 50% relief on death.
So that is a really a big bit of uncertainty for people looking at passing things on isn't it? What about -
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Tom
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Sorry Tim, I was just going to say, just jumping in there. It's a really interesting point actually, because people are quietly wondering whether agricultural land values will drop as a result of this, and as you say, if it remains the case that the value for IHT is fixed at the date of gift if you have strong suspicion that values are going to fall significantly in the future that might encourage you to delay making gifts. But obviously, the rules would encourage earlier gifts and the other very quick point to make on gifts of course, you can only give away you can afford to give away. If you need to hold on to the whole of your farm, because that's the only source of income you've got, you are in a very difficult place indeed because you can't give away the farm to the next generation, say, but keep the income from it because that would be ineffective for Inheritance Tax.
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Tim
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Absolutely, and it's - you mentioned the next generation Tom and you've also got to have a next generation who wants to take it on, haven't you? And I suppose, you know, that's the whole, one of the main purposes of having the reliefs in the first place, is that this is to enable continuity of sort of family businesses.
But for some clients there may not be an identified, or suitable person to take on the business at the moment, which I suppose leads neatly on to trusts and what part they might play in people's planning and where people can use trusts ahead of the 6th April.
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Tom
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Yes, so the trust roles, we have an outline but were promised a further consultation next year on the detail and the indications, or what is said at the moment in the policy statement, is that a pre-30th October 2024 trust will have its own million pound allowance. Although quite how that's calculated and whether that means every pre-budget trust has that allowance, or whether it's only those that already own APR/BPR property.
But the trusts created after the Budget, so now and onwards they'll have one allowance which will be shared amongst all the trusts created by the settlor, the creator of that trust post the Budget. So if you create two trusts post the Budget, if I create those then each trust would have a 500,000 allowance. If I create one trust it would have a whole million pound allowance.
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Tim
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And that's Tom, the policy paper talks about relevant property trust doesn't it? So this is on 10 year anniversaries and exit charges and working out the the rate of tax there. But it's worth saying that you know, without the consultation yet we don't know quite how those allowances will factor through the calculations to get to the - and nor I think, is fair to say, that we have any clarity on whether pre-2006 life interest trusts, so trusts that aren't in the relevant property regime but are, but treat the property within the trust as belonging to the person with a life interest in that trust, will be within these rules. So you know, if you have property in your own name and property in a life interest trust, do you have 2 million pound or do you have1 million pound of allowance across the trust and your estate, as you do for the nil-rate band amount at the moment? So that's something that remains to be clarified.
And so there is an opportunity, I suppose, for people to look at trusts but they may not be an easy solution, but but equally times ticking isn't it? You know if we don't have the consultation till early next year and then not legislation until maybe later next year, actually to give people an even narrower window doesn't it to create those trusts before the 6th April, and particularly for older clients, as you say start their 7 year clock.
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Tom
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Yes I agree and I think, but there are opportunities to use trusts, particularly perhaps if the next generation hasn't yet got to an age where it's clear who might inherit or there uncertainties about who amongst them will inherit. So trusts are certainly going to be worth looking at.
I think so much, Tim, comes down to the age of the farmer or land owner and if you're in your 40's or perhaps early 50's, you might take the view that actually provided I don't die prematurely or have a horrible accident, this isn't yet a concern for me. I've got many years of ownership ahead of me and the prospect of Inheritance Tax is so distant that it really isn't something I'm going to be terribly worried about at the moment. Perhaps take out some life cover, but if you're relatively young that could be quite cheap as well.
Where it is much harder is if you're, say, in your 70s or above because there this has come out of the blue, it's a complete shock. You may have been planning for years around the notion that you got full relief, now that's being taken away potentially and your options may be really very few and that's why there is a bit of talk out there of trying to persuade the treasury to actually have an age at which, above which, these rules might not yet apply. But yet to see whether that gains any traction.
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Tim
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Yeah I think that's most of the IHT points covered, Tom. But the Budget obviously didn't just talk about IHT, there were another few tax changes that will affect land owners. One of which was Capital Gains Tax, which we spent a lot of time focusing on pre-budget. Could you remind listeners what's changed?
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Tom
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Yes, so as you say Tim, in common with many accountants and lawyers, we spent a lot of time before the Budget working for clients who wanted to try and trigger Capital Gains Tax disposals, because the pre-Budget rate was 20% on capital gains on non-residential property. And they were very concerned that the rate was going to go up very dramatically in the Budget and some suggestions it might even double to income tax rates, and therefore they wanted to try and capture the old rate before it was too late. And we're all very busy in work to do that. As it's turned out, the rate increase was really comparatively modest, it's gone up to 24% for non-residential at disposals and stuck at 24% for residential.
So much of that work, whilst it may have given rise to a small Capital Gains Tax saving, nothing like the benefit that was hoped for. But it's worth saying of course, that Capital Gains Tax is another factor which clients thinking about making gifts need to contemplate because it may be possible to hold over capital gains on gifts of farming assets, particularly those which qualify for agricultural property relief, but there will be assets on many farms such as let cottages, or properties, that won't be eligible for CGT hold over relief, and therefore they may be difficult to give away without triggering CGT and will be subject to Inheritance Tax if you don't give them away.
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Tim
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And that's the sort of double bind isn't it, of you triggering CGT and then possibly also then having an IHT charge as well, you know in the worst possible world. And it's also worth saying that like hold over relief hasn't changed in the Budget, so those rules remain the same, and you also still get the Capital Gains Tax uplift on assets on death as well. So, that was another subject of discussion over preceding years, around whether if you had an asset that qualified for Inheritance Tax relief whether you should still get that Capital Gains Tax uplift, but that has remained.
And we touched, Tom, on anti-forestalling for Inheritance Tax and I think it's worth mentioning that there are some slightly confusing, I think it's fair to say, anti-forestalling rules around CGT for which we do have some draft legislation, and for those of you who listen to the first episode of this series of the podcast we touched on how those rules work. But I think in very broad terms, what they say, what they appear to say rather, is that for transactions where you had a contract pre-30th of October, where there won't be a transfer of property, and transfer is the term the draft legislation uses, after 30th of October you may be subject to the new rate, so the new higher 24% rate rather than the previous 20% rates.
Now, it's not very clear how those rules are intended to work and what transactions they really intended to catch, but at the moment the draft legislation seems very broadly drawn and we hope that there'll be some clarity on what sort of transactions are meant to be included in that soon.
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Tom
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And Tim, you mentioned that Capital Gains Tax uplift on death hasn't been tinkered with, and as with some other aspects of the Budget I think there are a number of things that where we expected changes where none have occurred. Another one is that, I don't think anyone would have been particularly surprised, the rate of APR being reduced for agricultural landlords for post-1995 tenancies. The old rule was that 100% APR applies and indeed that rule continues, but subject to the million pound cap. But many landlords, I think, were not hoping for, they were with some trepidation looking forward to perhaps a reduction in that and that hasn't happened. We've got the cap instead.
What about the the good news though from the Budget? Not a great deal, but we do now have the confirmation that land subject to ELMs will qualify for agricultural property relief, which is good news, and that at least puts away any doubt there was there which was a concern for some.
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Tim
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And as well as ELMs, it's also the ecosystem services markets, and carbon markets as well isn't it, Tom? Which is a sort of a good news piece there. I suppose it's worth noting on that, as we expected from the consultation early last year, those markets will only be the government markets so this is BNG, Biodiversity Net Gain, where you have either section 106 or responsible body agreements backed by government and also the Woodland Carbon Code and Peatland Carbon Code arrangements.
What it doesn't cover at the moment are the private market schemes, which is a sort of growing area and what government, I think, hopes will be the real driver of change in land use and the support of land owners for carbon sequestration and the drive for Net Zero. But it's a little bit disappointing that maybe the changes to the tax code don't quite support those wider nature market arrangements and are just limited to the government ones, but as as you said Tom that was expected and well trailed.
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Tom
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Yes exactly, I suppose a step at a time. I suspect the government might have been concerned that the floodgate argument of allowing schemes that perhaps weren't properly validated or robust enough, but time will tell.
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Tim
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So, thanks Tom. I mean that's a really helpful run through of those main points for landowners and farmers I suppose though, what are we, what should clients be doing now, what's the takeaway for them?
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Tom
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Well I think the first thing to say, Tim, is don't panic. These are very significant changes but we need, in many cases, to have more detail. There also needs to be a very close examination of individual businesses to work out how they might be affected and what the opportunities might be, and that will take a bit of time.
And as I said before, age is a very relevant factor here. The urgency with which someone might feel this needs looking at really will, in many cases, be in direct correlation with their age and if you are in your late 70s or 80s and still owning your farm and haven't already taken steps to give it away, then there probably is reason to start talking to your professional advisers, rather sooner than later. If you're in your 60s or lower, then there's probably less pressure, unless there is another reason to be concerned about your longevity.
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Tim
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Well Tom, thank you so much.
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Tom
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Thank you very much. [Music]
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Tim
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Thanks again for listening to this episode of Death & Taxes, the Private Wealth podcast from Burges Salmon. You can listen to our previous episodes and get in touch with the team at Burges-Salmon.com, or on our LinkedIn page. We'll be publishing new episodes every Friday between now and Christmas and the next episode will explore the implications of the Budget for non-doms and international individuals, and offer some practical advice on the steps they can take. So don't forget to subscribe and thank you again for listening. [Music]
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