Capital Gains Tax (CGT)

Current situation: Under the current tax regime, farmers benefit from various reliefs that help mitigate the impact of CGT when they sell or transfer property. This includes the ability to claim reliefs like Business Asset Disposal Relief (BADR), which reduces the CGT rate to 10% on qualifying assets, up to a lifetime limit of £1 million.

Potential changes: Labour has indicated that it may seek to align CGT rates more closely with income tax rates. This could result in higher CGT rates, potentially rising from 10% for a basic rate taxpayer to 20%, 40%, or even 45%, depending on the individual’s overall income. Additionally, there is speculation that Labour might reduce or even abolish BADR, which would further increase the CGT burden on farmers selling or transferring qualifying land and assets.

Inheritance Tax (IHT)

Farmers benefit significantly from reliefs that mitigate IHT, allowing for the smooth transfer of agricultural property across generations. The main reliefs are:

• Agricultural Property Relief
• Business Property Relief
  

Agricultural Property Relief (APR)

Current situation: APR is a critical relief for farmers, providing up to 100% relief from IHT on the agricultural value of the property, including land and buildings, provided certain conditions are met. This relief is vital for enabling the transfer of farms to the next generation without incurring prohibitive tax charges.

Potential changes: Labour’s potential overhaul of APR could involve tightening the definitions of qualifying agricultural property and introducing caps on the value that can benefit from relief. They might also consider phasing out APR entirely, integrating it with broader IHT reforms aimed at higher taxation on substantial inheritances. Such changes would likely increase the financial burden on farming families and could lead to more farm sales and consolidations, impacting rural communities and agricultural production.

Business Property Relief (BPR)

Current situation: BPR offers support for farmers, granting up to 100% relief from IHT on qualifying business assets, including land, buildings, machinery and importantly, any development value of land over and above its agricultural value.

Potential changes: Labour has suggested that it might reform IHT to ensure wealthier estates contribute more. This could include reducing the availability or extent of BPR. For example, Labour might lower the relief rates or introduce stricter qualifying criteria, particularly around the definition of what constitutes a trading business for BPR, as the current wholly or mainly test is quite lenient.

Implications for farmers

Financial impact: Higher CGT and IHT rates, coupled with reduced reliefs, would substantially increase the tax liabilities of farmers. This could lead to financial strain, particularly for those with high-value estates but limited liquidity. The need to sell assets to meet tax liabilities could disrupt farming operations and long-term planning.

Succession planning: Changes to IHT and APR would complicate succession planning for farmers. The increased tax burden could make it more challenging for younger generations to take over farming operations, potentially leading to a decline in family-owned farms.

Operational sustainability: The potential loss of significant reliefs could force farmers to reconsider their operational strategies, possibly leading to increased debt or the sale of farmland. This could result in reduced agricultural output and greater consolidation within the industry, affecting the diversity and sustainability of UK agriculture.

Conclusion

The potential changes to CGT, IHT, and APR under a Labour government represent a significant concern for the farming community. Farmers must stay informed about these potential changes and consider proactive financial and succession planning strategies to mitigate the impact. Engaging with agricultural and tax specialists will be crucial in navigating this evolving tax landscape.

This article is from the latest edition of our Agricultural Briefing. To receive future copies of any of our newsletters directly to your inbox, please  visit our preference centre   to register your interest.