Following the UK departure from the EU on 31 January 2020, there is now a concerted effort towards progressing the Agriculture Bill through Parliament which will be finalised as the Agriculture Act later in the year.
As you would expect at this stage of proceedings very little has been mentioned of the tax effect of the various facets of the proposed new legislation, but the draft provisions do give rise to several tax uncertainties that will affect farming businesses going forwards.
The main tax issues are:
The draft Bill refers to the ability to delink future payments to food production. It is likely to remain the position that these payments will be treated as income and therefore subject to income tax. However, whether this income will be considered income from farming or from a trade is difficult to tell especially as the Government has confirmed that there is no direct relationship between these payments and crop production. If the result is that the payments are not treated as farming income this could impact a whole host of other tax issues. In particular, the ability to apply the farmers averaging rules to this income and, whether it adversely affects the balance of income flows for the purposes of determining whether Business Property Relief for Inheritance Tax purposes is available under the “Balfour” principles.
The Government are to consult on a possible option to take the future payments as a single lump sum rather than a series of annual sums. As such, there may be an argument that this lump sum should be taxed under Capital Gains Tax (CGT) and therefore benefit from the generally lower CGT rates. However, early indications are that the lump sum is merely a receipt of a single large income payment and the tax take from this could therefore be quite significant – especially if Farmers Averaging is not available.
Farmers are to be encouraged to put land into some kind of longer term Environmental Land Management schemes (ELM’s) and it is not yet clear whether this will be considered an agricultural activity. If it is then that would qualify for Agricultural Property Relief for Inheritance Tax (IHT) purposes. Or, if not that then it could be considered a business activity that would qualify for Business Property Relief. However, if neither options are available this could potentially scupper IHT planning.
Staying with Capital Taxes, Basic Payment entitlements, for those that have bought them, will no longer have a value beyond 2020/21 and this creates a Capital Loss in the hands of the holder. Equally, the delinked payment stream of income to be received in the following years may itself have a capital value but it is not clear what tax reliefs these capital values will attract.
At this stage it is not possible to give any definitive answers to any of these points but hopefully the above points do highlight some of the uncertainties. We hope that announcements over the tax effects will follow quite quickly as the Bill gets closer to the final stages before Royal Assent.