Taxation of farming subsidies
Eligible farmers who applied under the Lump Sum Exit Scheme (LSES) in 2022 will receive, or already have received, a lump sum payment from the Rural Payments Agency. This replaces payments that would have been due under the basic payment scheme until 2027. It was confirmed that this lump sum will be subject to capital gains tax (CGT), instead of being included as trading or miscellaneous income, as would be the case with annual payments.
There will be no CGT base cost to the LSES lump sum, so the full proceeds will be subject to CGT. Deeming LSES lump sums capital will however enable farmers to access CGT reliefs that would otherwise not be available.
Farmers ceasing to trade may qualify for business asset disposal relief, which provides a lower 10% rate of CGT on capital gains, subject to a £1m lifetime limit. Should farmers diversify into another trade venture, such as furnished holiday lettings (FHL), rollover relief may be available to roll over the capital gain into the base cost of the FHL property.
Farmers in receipt of LSES lump sums should take advice on mitigating any tax liabilities that might crystallise on these receipts.
The Chancellor announced that legislation will be introduced from 6 April 2024 to restrict agricultural property relief (APR) and woodlands relief to property situated within the United Kingdom only. Currently property located in the UK or a state within the European Economic Area (APR and woodlands relief) or Channel Islands and Isle of Man (APR only) will qualify.
Corporation tax and capital allowances
While the Chancellor maintained the planned increase in corporation tax from 1 April 2023 and return of the associated company rules, he did extend the ‘super deduction’ under a new guise of ‘full expensing’. This will afford up to 100% tax relief on all new plant and machinery acquired by UK companies until 31 March 2026. While many landed estates will have companies in their structure, this measure is only available to companies, which will mean that some structures that include limited liability partnerships (LLPs) or general partnerships will be left out. While partnerships can generally still qualify for the annual investment allowance (100% relief on new plant and machinery up to £1m spend per year), the unlimited cap offered by ‘full expensing’ does encourage investment via corporate vehicles.
On a personal level, and perhaps one of the more surprising announcements, was the abolition of the lifetime allowance on pension savings. Currently set at a little over £1m, removing this upper limit on pensions savings allows landowners to consider further investing in their retirement, where previously the relatively penal tax regime for large sum pension savings might have presented an obstacle.
The Chancellor also increased the annual allowance for pension contributions from £40,000 to £60,000 per tax year, and from £4,000 to £10,000 for the money purchase annual allowance where an individual has already accessed their pension flexibly.
These changes do provide opportunity for landowners to consider new strategies for wealth preservation and growth, and with many landed estates featuring owner-managed companies, allowing for tax-efficient pension contributions at company level.
Consultation – environmental land management
Farming in the UK is experiencing a large-scale change and despite food production still being the primary purpose of farming, farmers also play a crucial role in protecting and enhancing the natural environment. While many landowners and farmers may agree with this sentiment, underpinning any change in land use or industry practices is the impact it will have on the owners and their families and businesses.
Following the adoption of the Agriculture Act in 2020, and the phasing out of agricultural support schemes by 2027, landowners will need to rely on the three environmental land management schemes for financial support, the sustainable farming incentive, countryside stewardship, and landscape recovery. With the Net Zero Strategy from the Government outlining an ambition for 75% of farmers in England to be engaged in low carbon practices by 2030, many farmers and landowners will however be looking further into carbon sequestration/capture and biodiversity to further enhance financial support and growth.
The consultation focuses on three key areas:
- The taxation of ecosystem service markets (woodland carbon, peatland carbon, biodiversity net gain).
- Availability of agricultural property relief for changing land use (from farming to environmental).
- Potential restriction to agricultural property relief for farm business tenancies of at least 8 years or more in term.
These are all key areas for landowners and Evelyn Partners will be submitting a response based on our experiences and conversations with our many landed estates and rural clients. A key outcome for landowners will be certainty over the taxation in these areas to ensure operational, strategic and financial decisions can be made with all the facts to hand.
Taxation of environmental land management and ecosystem service markets
The Government has published a call for evidence and consultation to explore both the taxation of ecosystem service markets and the potential expansion of agricultural property relief (APR) for certain types of environmental land management.
The Government is putting in place frameworks to support higher private investment in nature’s recovery with an anticipated nature markets framework set to be published shortly, alongside implementation of mandatory biodiversity net gain for development sites.
The call for evidence focuses on the tax treatment of ecosystem service markets, such as the production and sale of units in connection with carbon, peatland, and biodiversity, as well as the changing landscape in land use and farming. The latter element is also being discussed in the context of the availability of APR where land is no longer being used for agricultural activities and instead being used for environmental sustainability.
Discussions within the call for evidence also highlight the availability of APR for longer-term tenancies of agricultural land following the independent review of tenant farming in England in 2022 by Baroness Rock.
Following the reduction in subsidies from 2027, shifting from the basic payment scheme to the environmental land management scheme, many farmers and landowners are looking to access agri-environmental schemes to supplement income and livelihoods.
With inheritance tax largely at the forefront of many landowners’ minds, and plans of succession to family members in the future, having certainty over income and capital taxes of agri-environmental schemes will provide comfort to many to aid in operational and strategic decisions.
When will it apply?
The consultation closes on 9 June 2023
Geographical scope of agricultural property relief and woodlands relief reduced
Legislation will be introduced to restrict the scope of agricultural property relief (APR) and woodlands relief to property in the UK only.
APR can currently be claimed on agricultural property situated in the United Kingdom, the Channel Islands, Isle of Man or a state within the European Economic Area (EEA) – the latter being broadly any countries in the EU plus Iceland, Liechtenstein and Norway. Woodlands relief can currently be claimed on the value of trees or underwood. though not the underlying land, growing in the UK or a state within the EEA.
Broadly, APR provides relief on the agricultural value of qualifying property for inheritance tax purposes at a rate of 100% or 50% depending on specific ownership and occupation conditions. Woodlands relief provides relief for 100% of the value of trees or underwood but not the underlying land, which is not considered agricultural property.
The new legislation will restrict the ability to claim APR and woodlands relief to land situated in the UK only.
Landowners holding agricultural property or woodlands situated outside the UK will need to consider possible operational changes such as occupying property in hand when it was previously let. For many, the loss of IHT relief might trigger a decision to sell the land outside the UK to acquire land within the UK.
While APR provides relief from the agricultural value only and woodlands relief for the value of trees or underwood, the continued availability of business property relief (BPR) may provide IHT relief where landowners are carrying out a trading business that includes offshore agricultural property and woodlands. Where agricultural land or woodlands are let out to tenant farmers or foresters however, BPR will not usually be available unless the land forms a smaller part of a bigger trading business.
When will it apply?
From 6 April 2024.
Reforming pension tax thresholds
The pension lifetime allowance charge will be removed, before it is fully abolished in a future Finance Bill. Alongside this major change, increases in the annual allowance, the money purchase allowance, the minimum tapered allowance, and the minimum tapered allowance income threshold were also announced.
The lifetime allowance is the maximum amount that can be held in a pension before it is subject to an additional tax charge. Currently, the allowance is £1,073,100. From 6 April 2023, the lifetime allowance charge will stop being levied and from April 2024 the lifetime allowance itself will no longer exist. This means that an individual is no longer restricted on the total amount that can be held in the pension fund.
Despite the lifetime allowance being removed, there will still be a restriction on the total amount of tax-free cash that can be taken from a pension. This will be limited to 25% of the current lifetime allowance, which equates to £268,275. That said, anyone with any form of lifetime allowance protection will still be entitled to a higher level of tax-free cash. It is not yet clear whether or not making future pension contributions will result in this protection being lost.
The annual allowance for pension contributions will also increase from the current level of £40,000 to £60,000, and the ability to carry forward unused allowances for three tax years will remain in place.
Annual allowance tapering will also remain but the threshold after which the annual allowance will be reduced will increase from £240,000 to £260,000. The minimum annual allowance after tapering will increase from £4,000 to £10,000.
Finally, the money purchase annual allowance will increase from £4,000 to £10,000. The money purchase annual allowance may apply if an individual has already started to draw an income from their pension.
Following many years of restrictions being applied to pension savings, this is certainly welcome news. Relaxation of allowances was expected, with specific reference made to NHS doctors, where reports suggested 80% were being caught by the lifetime allowance charge when retiring.
The announcement however takes this further than anticipated with the abolition of the lifetime allowance.
As the Chancellor pointed out, this will not only benefit NHS doctors but also many other pension savers who were reluctant to continue saving into their pension for fear of breaching the lifetime allowance.
As pension funds usually fall outside the scope of IHT, this abolition has the added advantage for taxpayers of providing additional shelter from IHT.
While the lifetime allowance means there is no restriction on the size of a pension pot when taking benefits, tax-free cash will still be limited to 25% of the 2022/23 lifetime allowance.
Additionally, the annual allowance restriction and tapering rules still remain in place, which will limit a high earner’s ability to save into their pension.
Overall, however, a positive set of announcements for those looking to save for the future via a pension.
When will it apply?
From 6 April 2023.
New full 100% expensing regime for capital expenditure on qualifying assets
From 1 April 2023, companies will be able to claim 100% and 50% first year allowances for qualifying capital expenditure on new main rate and special rate plant and machinery expenditure, respectively.
The Spring Finance Bill 2023 will include measures allowing companies to fully expense capital expenditure on new main rate plant and machinery, for a period of three years starting from 1 April 2023. Under this regime, businesses will save 25p on every £1 invested, so a 25% cash tax saving. The 50% first-year allowance for expenditure on new special rate and long-life assets has also been extended.
Both measures will be in place until 31 March 2026, with the intention to make the measures permanent when fiscal conditions allow.
In addition, measures first announced in the Autumn Statement 2022 will be legislated by the Government. This extends the first-year allowance on electric vehicle charge points by two years to 31 March 2025 for corporation tax, and 5 April for income tax. It also extends the £1 million Annual Investment Allowance indefinitely.
The introduction of full 100% expensing for capital expenditure on qualifying plant and machinery will be welcomed by companies, particularly given the end of the current super deduction which coincides with the increase in the corporation tax main rate to 25% from 1 April 2023. The intention to make this a permanent feature will also be well received and provide businesses with some certainty in undertaking investment decisions.
It is disappointing the relief is only available to companies within the charge to corporation tax and excludes individuals and partnerships containing individuals.
This is potentially a missed opportunity to better align the capital allowances regime with the Government’s wider strategies, particularly as investment decisions made now will impact the UK’s ability to meet its net zero target by 2050.
Whether or not this type of blanket untargeted relief provides the best return for both the Government and taxpayers is also debatable. The Government had stated that the previously introduced super deduction was costly to operate, and it is difficult to see how the introduction of full expensing will provide much better value for money.
When will it apply?
From 1 April 2023.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.