The impact of the emergency budget on rural estate owners
Date : 29 June 2010
James Del Mar, head of Knight Frank’s Rural Consultancy Department, commented:
“The emergency budget on 22 June leaves very few people in the UK completely unaffected, but it could have been much worse for everyone, including rural property owners. The increase in Capital Gains Tax was lower than many were predicting and although some investment allowances have been reduced there was no attack on Agricultural Property Relief. We believe it to be a reasonable and well balanced set of proposals - not least considering the parlous state of national finances.
“However, it is still well worth taking professional advice on a number of the measures announced by the Chancellor to ensure every rural estate or farm is structured correctly to make best use of the tax reliefs and incentives still available to them.”
Budget summary by Andrew Shirley, head of rural property research
Capital Gains Tax and Entrepreneurs’ Relief
The increase in CGT from 18% to 28% for higher-rate taxpayers was not as bad as some people feared – a rate of 50% was not out of the question - but nevertheless it does raise some important issues for anybody thinking of selling property in the future. What was surprising was that the increase came into force on midnight on the day of the budget. This left little opportunity for anybody to sell their assets quickly and take advantage of the existing rate of CGT.
One of the easiest ways for rural property owners to mitigate against the CGT increase is to use Entrepreneurs’ Relief, which is available on the sale of an eligible business. Any gains from the sale of a qualifying business up to a specified limit attract a CGT rate of just 10%
In a rare moment of generosity in an otherwise parsimonious budget, the Chancellor raised the ceiling for Entrepreneurs’ Relief from £2m to £5m. This means many farm or land sales could effectively be exempt from the new higher rate of CGT.
Landowners need to make sure they are in a position to make best use of Entrepreneurs Relief if the need to claim it ever arises.
The amount of gain on which relief is available can effectively be doubled from £5m to £10m if a business run by a husband and wife (or those in a civil partnership) is structured correctly. If both parties are genuine partners in the business each can claim the relief.
Entrepreneurs’ Relief, however, cannot be claimed on the sale of let land and farms; there needs to have been active involvement in the actual farming. This does not mean the property in question has to be registered as a business, but there must be some evidence of trading being conducted on the owner’s tax returns.
Owners of let land thinking of selling sometime in the future may want to take advice on how they can bring themselves back into the fold of Entrepreneurs’ Relief by looking at the structure of their business. Employing a tenant as a contractor could be a possible option to explore.
It is also worth noting that Entrepreneurs’ Relief is a lifetime allowance so cannot be used once the maximum gain has been claimed against at 10%.
Corporation Tax
As part of his bid to ensure the private sector helps drive the UK’s economic recovery the Chancellor cut corporation tax from 28% to 27% from 1 April 2011. There will be a further 1% cut each year until the rate hits 24% for the 2014 financial year.
The small companies rate of tax will also fall from 21% to 20% on 1 April 2011.
Any farms or estates not paying tax as a corporation may now want to consider restructuring to take advantage of the lower rates of tax.
Capital Allowances
The Chancellor giveth, but he mostly taketh. Capital allowances were definitely in the taking camp with the valuable Annual Investment Allowance being slashed from £100,000 to just £25,000. This could be a big blow to many farms and estates, which have to make irregular investments in items with a high capital value like combines and tractors.
The new reduced allowance will not come into effect until April 2012 so anybody who is considering a large capital purchase over the next few years would be advised to bear this in mind. The write-down allowance for plant and machinery also falls from 20% to 18%.
Employment Incentives
New businesses set up after 22 June 2010 in certain areas of the UK (those outside the south, southeast and east of England) will be exempted from paying National Insurance contributions for each of their first 10 employees. The exemption covers the first £5,000 of contributions for each employee. This measure may be of use to farms or estates planning to expand.
Furnished Holiday Lets
As expected, the Chancellor scrapped Labour’s proposals to remove the tax exemptions for Furnished Holiday Lettings for the 2010-2011 tax year. FHLs provide a good income stream on many rural estates so this move is welcome.
The government, however, will consult on the tax treatment of FHLs from April 2011 onwards including the number of days that each property has to be available to rent to qualify for the reliefs. Anybody who could be potentially affected by future changes should stay in close contact with their property adviser and work with lobbying organisations such as the Country Land & Business Association, which will undoubtedly be pressing the government to continue to treat FHLs favourably.
Inheritance Tax on Trusts
No specific measures were announced in the budget, but the government will consult on bringing IHT within the Disclosure of Tax Avoidance Scheme. Those likely to be affected by this should seek expert advice.
Key points for rural landowners to consider
- Consider incorporating businesses (if not already) to take advantage of lower rates of Corporation Tax
- Make sure businesses are structured to make maximum use of Entrepreneurs’ Relief to mitigate increase in Capital Gains Tax
- Plan capital purchases before investment allowances are reduced in 2012
- Look at employment incentives for new businesses
- Be aware of potential changes to tax treatment of Furnished Holiday Lets
- Be aware the government is consulting on Inheritance Tax on trusts
For more information on these or any other issues affecting rural property ownership please contact:
For full details of the rural property services offered by Knight Frank and to see our latest research please visit www.knightfrank.co.uk/rural