Time for a change…. what does it mean for you?

As I sit here writing this article, Liz Truss has just resigned as Prime Minister of the United Kingdom.

This was an article we were thinking of writing in this edition, and the events of the past month have brought the reality of a change in government to the front of most professionals’ minds again.

This winter the Energy Bills Support Scheme needs to be paid for and the financial books of the United Kingdom are under heavy scrutiny. This means that whatever the colour of the party in No10, they will not be able to borrow the full amount required to fund the deficit and we will have to pay the burden through an increase in tax or spending cuts to our national services.

It is important for farming businesses and landowners to consider how a change in government may impact them. The following are some of the areas that a new government could target:

There have long been rumours of reforms to CGT. Some of the changes that a new government could make are as follows:

• Align CGT rates with income tax rates

This would increase the tax on gains within the basic rate band from 10% to 20% and from 20% to 40% and 45% within the higher and additional rate bands. This would double CGT liabilities.

This would not hugely impact the sale of residential properties which are already taxed at 18% and/or 28%.

• Reduce the annual exemption for CGT

The tax-free annual exemption of £12,300 could be reduced to £2,000 - £4,000. This would bring many more disposals into the charge to CGT and reduce the ability to spread gains over two or more tax years to reduce liability.

Further changes could be to remove or restrict Rollover Relief, Holdover Relief or Business Asset Disposal Relief.

The justification for a Wealth Tax has probably never been as prominent as it is now. Our healthcare system requires serious investment, and the majority of UK households are in need of cost-of-living support due to rising energy bills.

The Wealth Tax Commission was established in Spring 2020 and the report recommended two options:

• A 1% charge on all individual wealth above £500,000 payable over five years
• A 1% charge on all individual wealth above £2,000,000 payable over five years

At a threshold of £500k, this would raise £260billion and at a threshold of £2million, it would raise £80billion.

The report does not suggest there should be any relief for business assets, therefore for farming business, these liabilities could be sizable. As a result, assets may need to be sold to fund the tax.

Dividends are currently taxed at 8.75%, 33.75% and 39.25% within the basic, higher, and additional rate bands respectively. Income tax thresholds are currently 20%, 40% and 45%, therefore there is a large discrepancy across all tax rates.

Dividend tax rates could therefore be increased to align with earned income tax rates. This change would particularly impact our farming clients who trade through limited companies and draw money via dividends. It could make trading through a limited company much less tax efficient.

Further changes could be to reduce or remove the tax-free allowances for both dividend and savings income.

Currently, only 5% of deaths in the UK result in any IHT being payable. Therefore, many view IHT as requiring reform and both the Office for Tax Simplification, and the All-Party Parliamentary Group have made changes to make IHT simpler.

Some reforms that could be implemented are:

• Removal of IHT reliefs
• Under current reliefs most farming businesses and landowners benefit from Agricultural Property Relief (APR) and Business Property Relief (BPR). This often means that no IHT is payable on death.
• One option could be to remove either APR or BPR. The removal of APR would primarily impact landowners who rent their land out as this would likely lose relief. The removal of BPR would impact farming businesses with any hope value on land or any let property, as these would become chargeable to IHT on death.
• A restriction or removal of the CGT uplift on death
• Under current legislation, the death of any UK resident results in the base cost of all death estate assets being increased to market value. Subsequent sales of assets inherited from the estate are then often CGT free. There is an argument that this uplift should be removed or restricted.

If the CGT uplift on death were completely removed, then assets would be inherited with the original base cost of acquisition. This would result in a considerably higher CGT liability if or when the asset is sold.

For farming businesses and landowners, the above changes would have a significant impact on the IHT due on death. Assets may need to be sold to fund the IHT liabilities, or money may have to be borrowed from the bank. Reforms to IHT could also impact the value of farmland in the future.

In summary, a change in party at Number 10 could have some potentially large tax implications for our farming and landed estate clients. It is therefore important to consider your exposure to the above changes and to plan for how best to mitigate the impact.