Window of opportunity for tax planning

Farmers and landowners should think sooner rather than later about moving assets to the next generation to ensure continuity and longevity, but also to seize the opportunity of favourable tax reliefs before they disappear.

States private client specialist John Rouse.

Within the last couple of years, the government has announced major reviews of capital taxes. Whilst we await the Office of Tax simplification reviews of Inheritance Tax (IHT) and Capital Gains Tax (CGT), we know that change to the regimes is inevitable.

Expectation

It is generally considered the current CGT regime is about as generous as it will get, and any changes will probably result in a combination of higher rates, reducing allowances, restriction in reliefs and overall a much tighter regime. The availability of rollover and holdover reliefs are very valuable for rural landowners and businesses. Withdrawal or restriction of those reliefs could make it  more difficult for farmers to pass on farm businesses to the next generation without the significant risk of substantial tax liabilities. Given the likelihood of a less favourable CGT regime, there is a finite window of opportunity for CGT planning, and for farmers to look at restructuring and passing assets on before any new rules come into place.

The simplification review could also mean tighter restrictions on IHT, specifically Agricultural Property Relief (APR) for farmers. Whilst this is a worry for farmers, for most family farms this  shouldn’t be too much of a problem, so long as they have appropriate planning and structuring of the business, so the business and farm are set-up to maximise Business Property Relief (BPR).

Best of both worlds

Historically, is has been advantageous for individuals to hold on to assets and pass them on death to the next generation and obtain a ‘tax-free uplift’ of the value for CGT purposes, whilst being able to rely on the availability of IHT APR and BPR preventing any inheritance tax liability – and the best of both worlds for capital taxes. However, the ‘tax man’ is aware of this double benefit
and might remove it, so passing on businesses and properties should be considered within the next 12 months or so.

For landowners owning assets with the potential for substantial growth in value (such as potential development land), it is well worth considering whether to gift land to the next generation, either
as an outright gift or into trusts, so any growth in value is outside of the estate.

Alongside, the vulnerability of APR highlights how rural landowners deal with the working of their land. Landowners should consider new arrangements, avoid formal tenancies, and look at farming the land themselves or in conjunction with other farming businesses by way of share or contract farming arrangements.

Joint enterprise

We have seen a growing trend in the number of new joint enterprise arrangements. For tax reasons, traditional farm tenancies are less popular and joint venture arrangements, share farming and contract farming agreements are becoming a more favoured approach.

Consider how the land is and could be farmed, factor-in tax efficiency, and plan knowing that inheritance tax APR may be restricted or removed altogether in future. Avoiding tenancies and  entering into new joint venture enterprise arrangements provide a strong and tax efficient alternative and will certainly continue to figure in robust succession planning that futureproofs
the farm.

More insights

John Rouse is a partner in Lodders’ Private Client department, working with business owners, farmers, landowners, high net worth individuals and for different generations of the same family. For more information, please get in touch with John Rouse on 01789 206167 or via email.

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