Capital gains tax (CGT) is the tax paid on gains realised on the sale of assets such as land, buildings, dwellings, shares and other property. The rates of CGT are low compared to personal income tax rates with CGT rates on residential property 18% to 28% and all other property at 10% to 20%. This compares to personal tax rates of up to 60%.
In addition, for gains on farmland and buildings, many farming businesses benefit from Business Asset Disposal Relief (BADR), previously known as Entrepreneurs Relief (ER). BADR halves the tax rate to 10% – particularly beneficial when land is sold for development.
In the early stages of the Covid-19 pandemic, we had the spring budget which reduced the BADR lifetime limit from £10M to £1M per individual. Even if we ignore development gains, given the average worth across all UK farms is £1.82M per farm (DEFRA 2018/19), the impact on the sale of farms and farmland is considerable – additional tax due of £100K for each additional £1M of gain. For those with £10M of gains, the tax cost is £900K.
Planning can be put in place to maximise the use of the £1M BADR lifetime limit so, if a sale is planned, advice should be taken over two years in advance of sale.
Against the backdrop of Covid-19, and unpresented Government support, in July Rishi Sunak wrote to the Office of Tax Simplification (OTS) asking for CGT to be reviewed. Whilst CGT receipts are at record levels the number of taxpayers chargeable to CGT has decreased. In addition, 25% of CGT came from disposals qualifying for ER with £2.7bn lost to the relief.
In November the OTS published their first report. The main context of the report was around the boundaries in the tax system – the ability for individuals to arrange their activities in such a way to remove income from higher income tax rates to lower tax rates of CGT. In the main, this would not affect farming businesses, who trade long term before handing the business down. However, it would be aimed at family investment companies and those looking to run a business before selling it on at a gain.
For the majority of farm and estate businesses the main recommendations which would have an impact are:
1. To reduce the tax-free annual exemption from the current £12,300 to £2,000-£4,000. This would bring many more into the charge to CGT and reduce the ability to spread gains over two or more
tax years to reduce CGT.
2. To increase CGT rates. The aim of this would be to reduce the complexity of the various rates in the tax system but also to remove the incentive for taxpayers to arrange their affairs to recharacterise
income as capital gains. Many argued, including the CLA national tax committee, in submitting evidence to the OTS, that an increase to CGT rates would be counterintuitive as it would discourage the sale of assets.
3. The OTS recommended that, should CGT rates be increased, consideration should also be given to bringing back relief for inflationary gains. Indexation was removed by Gordon Brown in 1998, when CGT rates reduced.
4. In the OTS review of inheritance tax (IHT) they recommended the removal of the market value uplift on death for CGT purposes, where assets qualify for IHT relief. The CGT OTS review has gone further suggesting it is removed entirely, for all assets, apart from the main residence. Therefore, there could be a double charge to tax where assets are sold on or after death. However, they suggested at the same time a broader lifetime gift relief should be introduced to encourage gifting in a lifetime. In addition, the CGT asset base cost date should be brought forward to a more recent date than 31 March 1982 – the report suggests 2000, which would help with the administration and give some relief for inflation since 1982.
5. There was no proposal to scrap holdover relief. Indeed, following lobbying by the CLA national tax committee, the report suggested holdover relief should be extended to a wider class of assets. This would help farms and estates pass assets down during lifetime, without a CGT bill.
The government has a difficult choice sourcing tax rises without affecting employment and the economy negatively or alienating voters. With IHT and CGT in governments sights and with the close interaction of the two taxes calls
into question the opportunity for the government to raise the tax base from these two taxes.
The next budget is on 3 March. This might be too early for major reform and tax rises, not yet being through the pandemic and with still so many to vaccinate. However, it would not be unexpected if there were rises in CGT rates
and further restrictions to BADR in the future.