Further to my article last week/month on potential changes to our capital taxes regime, I have been asked by several to provide examples of what the potential impact of some of the changes could be for a typical farming business.

As is shown by the scenarios below, the reliefs and exceptions that are available at the moment enable farming businesses to be transferred during lifetime or on death without substantial tax bills being paid. When this is compared to the scenarios if the changes come into force you will note that there is a dramatic difference.

A Report issued by an All-Party Parliamentary Group – ‘Reform of inheritance tax’ (January 2020) sets out the likely impact of the proposals on the public, and confirms that as regards the impact on the “very wealthy, with business and/or agricultural assets” the revised position would move them from a “little or no tax position” into a “significantly more tax, but spread over 10 years” position with “limited scope to reduce tax further with lifetime gifts”.  This could have a devasting effect on some of the farming family businesses that are the mainstay of our rural communities.

‘Current’ and ‘Proposed’ scenario examples:

Facts:

• Farm – Valued at £1,500,000
• Live and Deadstock – Valued at £150,000
• Cash – £50,000
• Business borrowings -£150,000
• Deceased’s own CGT liability – £80,000
• Farmer (in hand) – Alun, a widow
• All assets pass to son, John, under the Will

SCENARIO 1 – Gift the Farm under a Will

Current position

• IHT – £0
• CGT – £0
• John takes the farm free of any Inheritance Tax and Capital Gains Tax Liability
• Liability – £0

Proposed position

• IHT – £90,000
• CGT – £80,000
• The estate has to pay £90,000 on death or in 10 annual equal instalments of £9,000
• John takes on the CGT liability which will have to be paid to the HMRC should he ever sell or gift the asset on.
• Liability – £90,000 IHT and £80,000 CGT liability passes to son

 

 

SCENARIO 2 – Gift the Farm in his lifetime to John

Current position

• IHT – £0. The 7-year gift rules applies but, provided the assets satisfy the APR rules at the date of transfer, and there has been no change in its use since then, no liability should arise, even if Alun were to die within the 7 year period;
• CGT – £80,000 Alun’s CGT liability is either paid now or, a joint Holdover Election is made whereby John takes on the CGT liability from his father, which will have to be paid to the HMRC should he ever sell, or gift the asset on;
• Liability – No IHT liability. £80,000 CGT liability passes to son

Proposed position

• IHT – £0
• Lifetime gift tax – 10% above £30,000. Farm valued at £1,500,000 less £30,000 annual allowance = £1,470,000 taxed at 10% = £147,000 payable immediately in full
• CGT – £80,000 – there will be no option to defer this tax and it must be paid at the point of gifting by Alun. John will take the farm free of any previous CGT liability.
• Liability – £147,000 lifetime gift tax and CGT of £80,000 = £227,000 payable on gifting