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Cows & Money: July 2019

It’s been a while since the last Cows & Money newsletter, but. like buses. subjects for inclusion seem to all come at once!

In this edition we look at what the proposals from the Office of Tax Simplification and George Monbiot might mean for farmers, if politicians ever get back to governing the country rather than arguing over Brexit.

With land prices seemingly starting to come under threat, we look at the value of improvements made to farms.

I hope you find it interesting.

Rob Hitch

Which way next for capital taxes policy?

Political turmoil and economic reality are finally bringing Capital Taxes, Inheritance Tax (IHT) and Capital Gains Tax (CGT) into sharper focus.

This comes as no surprise. OECD statistics show that the UK total tax take as a percentage of GDP has now reached 33.3%. This is the highest it has been this millennium. Yet this is after a prolonged period of austerity and a heavy reduction in real term value of public sector budgets. With an aging population, the government recognises the future challenge of funding the NHS and Social Care in the coming decades. Are we starting to see a shift in focus by the tax man onto the assets of the older generation?

The Office of Tax Simplification have finally released their report ‘Simplifying the design of Inheritance Tax’ at the request of the Conservative party, just a month after the Labour party commissioned the ‘Land for the many’ report.

Both of these suggest some fundamental changes to capital taxes policy in the UK.

Current policy

Agriculture currently benefits from a rather benign capital tax regime and has done so for a number of decades. Since 1984 we have had varying degrees of Agricultural Property Relief (APR) and Business Property relief (BPR) that have ensured many farm businesses and land and property investments have escaped any IHT charge.

In fact for the last twenty years, since the case of Farmer, (Farmer & anr (Executors of Frederick Farmer Deceased) v Commissioners of Inland Revenue (1999) Sp C 216), we have relied on the view that BPR would be available to businesses where more than 50% of the business was trading, further reinforced by the Balfour case (Revenue and Customs Commissioners v Brander (Balfour’s Executor). [2010] BTC 1,656). This has allowed businesses to get IHT relief on otherwise taxable assets.

One of the big advantages of passing business assets, such as farms, on death has been the elimination of any capital gain through the uplift to market value for CGT purposes, particularly for land with hope or development value. This compares favourably with gifts during lifetime where, to avoid a CGT charge, a holdover claim is made, meaning tax is payable on any future disposal.

What happens next?

If the Conservatives adopt the recommendations of the ‘Simplifying the design of Inheritance Tax’ report then we could see big changes to the status quo.

The removal of the CGT uplift on death would make gifts on death the same as gifts during lifetime, so successors would always inherit assets at the CGT base cost of the donor.

The OTS also propose aligning the ‘trading’ qualification for both BPR for Inheritance Tax and Capital Gains Tax. For CGT purposes the bar is currently set at 80% rather than the 50% for BPR! Looking at the balance of property and investments within businesses would become much more important.

Scrapping IHT?

The Labour party sponsored ‘Land for the many’ report suggest scrapping IHT! Whilst you might initially rejoice at this fact, the problem becomes “what do you replace it with?”

The report suggests that individuals could benefit from a lifetime gift allowance of £125,000, with anything above this being taxed at their marginal income tax rates. The Conservative chairman Brandon Lewis has recently commented that this could see an individual earning £35,000 and receiving a £500,000 house from their parents landed with a £189,000 tax bill!

The big question here is, would any reliefs be available for business assets in the same way that APR/BPR apply to IHT? The report makes a suggestion that relief should perhaps only be available on the first 100 hectares.

A bird in the hand…

This brings in to focus questions about current asset ownership in the family. How is the farm land and other family assets owned and should we be looking to do something now, under the current regime, where we can hand assets down to children with no tax liabilities arising?

Having such generous capital tax reliefs in farming for so long, we can sometimes drag our heels over succession, and put off difficult discussions for another day. But there is a lot to be said for taking action now, when you can make a transfer of assets in the security and knowledge there will be no tax whatsoever. I don’t have a crystal ball for what the future holds, but 0% tax takes some beating and must surely be under threat.

As ever, please make sure you take professional advice before acting on anything above.

You thought buying a car was bad?

I’ve just finally succumbed and changed my car. The last one had done 150,000 miles, so I thought the depreciation charge hadn’t worked out too badly.

Having said that, I’ve just bought a replacement, that at a year old has lost 37% of its value!

Now I think this has probably given me quite a good “value for money” car, but it also shows how much money certain assets can lose quickly.

Perhaps the best example of this is milking parlours!  We have recently seen a farm valuation that gave no value to a milking parlour, (as dairying is too tough for anyone to do?) They may have some value as part of a farm, but they certainly don’t have any value to sell on. The costs of taking them apart often mean there is very little resale value once they are installed.

Its only a guess but I would think a parlour could lose 75% of its value the day it is built. Clearly investments of this magnitude have a significant lifespan, but to get a sensible return from the investment you probably need to be using the parlour in your own business for at least 10-15 years.

Perhaps this is an area where robots have an advantage as they are much easier to take out and re sell, albeit the concrete and investment in the housing will be lost if the robots are taken out.

The same could be said for other specialist equipment and buildings. Most of the cost of a cubicle shed is in the cubicles and slurry handling, but these have no value if a future purchaser doesn’t want to milk cows on the farm so should be looked at as investments that need to generate a return in order to recoup the investment.

None of this probably matters if you are going to carry on milking cows for fifteen years, but for those who are thinking of retirement before this time, or are entering joint ventures where valuations might be relevant then this needs careful thought and appropriate advice should always be sought.

If you have any queries on any of the above please contact Rob Hitch on 01228 530913, email him at rob@doddaccountants.co.uk or tweet him @Rob__Hitch.

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