20 Mar Budget 16 March 2016 Initial analysis for farmers and landowners
George Osborne set out to put stability first, to put the next generation first and to give a Budget for working people.
Certainly there were some headline grabbing measures that will benefit small businesses, such as the reduction in the rate of Corporation Tax to 17% from April 2020 and major cuts to business rates from April 2017 that will benefit farming businesses which diversify, where previously properties may have become liable to business rates as they no longer qualify for the agricultural exemption.
Capital Gains Tax
Other measures that will be welcomed by landowners are the reductions in the rates of Capital Gains Tax to 20% for higher rate taxpayers and 10% for basic rate taxpayers from 6 April 2016.
Unfortunately the reductions do not apply to residential property (other than when private residence relief is available), where the existing rates of 28% for higher rate taxpayers and 18% for basic rate taxpayers will continue. The Government is explicit in stating that retaining the 28% and 18% rates for residential property is intended to provide an incentive for individuals to invest in companies over property.
New Investors’ relief
The 10% rate of Capital Gains Tax payable where Entrepreneurs’ relief (ER) is available is to be extended to all investors in unlisted trading companies, whereas currently investors have to hold more than 5% of the share capital and be an employee or director to qualify for ER. This new “investors’ relief” would appear to be a “half-way house” between shares that qualify for exemption as they are issued under the restrictive Enterprise Investment Scheme and normal shares. To qualify for “investors’ relief” the individual investor (not trust) must have subscribed cash for ordinary shares in an unlisted trading company after 16 March 2016, and have held the shares for at least three years from 6 April 2016. Investors’ relief will be subject to a lifetime cap of £10 million per individual.
The detail of this relief will have to be seen, as farming will probably be amongst the list of excluded trades (as for the Enterprise Investment Scheme) and the rules are likely to restrict relief where shares are acquired by existing shareholders (to avoid “swamping” of existing shareholdings by new shares that qualify for the new Investors’ relief).
There have been various restrictions on the availability of Entrepreneurs’ relief (ER) in recent Budgets, including where personally owned assets used in the trade are disposed at the same time as there is an accompanying disposal of business assets where there are defined purchase arrangements. Unfortunately the broad definition of these purchase arrangements meant that they included disposals to a family member. The government has listened to criticism and realised that this is an unintended consequence of the 2015 changes, so will now retrospectively allow ER to be claimed on a disposal of a personally owned asset used in the trade when the accompanying disposal of business assets is to a family member on or after 18 March 2015 (when the changes were introduced).
However the Chancellor does not only raise money from the multi-nationals and tax avoiders, there are some measures that will impact negatively upon farm businesses:
Stamp Duty Land Tax on commercial properties
Commercial Stamp Duty Land Tax rates changed on 17 March from a “slab” system (a single rate of tax payable on the total consideration) to a marginal rate system (with tax payable at different rates for each band of consideration) as follows:
|Property price (£)||
Rate from 17.03.2016
On marginal rate basis
Rate to 16.03.2016
On a “slab” basis
|500,001 or more||
In practical terms, this will increase the SDLT payable on commercial property transactions in excess of £1.05 million and is clearly expected to be a money raiser, as although the Chancellor announced in his speech that over 90% of businesses would see their tax bills cut or stay the same, this change is expected to raise £500 million a year.
Stamp Duty Land Tax on residential properties
As announced in the Autumn Statement, from 1 April 2016 the purchase price of a buy-to-let property or second home will attract a 3% Stamp Duty Land Tax (SDLT) surcharge.
Following consultation, it has been announced that there will be no exemption from the higher rates for significant investors, and the higher rates will apply equally to purchases by individuals, companies and non-natural persons (eg partnerships and settlements).
This will mean that residential property acquired by companies and partnerships will usually be subject to the 3% SDLT surcharge. However, there will be some exemptions, for example when a life interest settlement purchases a residential property for the life tenant, the surcharge will be calculated by reference to the life tenant’s position.
An unexpected and harsh outcome will be where a partner in a partnership purchases a residential property personally (other than their main residence), as whether the partner’s interest in the partnership’s residential properties can be ignored in considering whether the 3% SDLT surcharge applies will be dependent upon whether the partnership’s residential properties are used in the partnership’s trade. A property letting business is not a trade, so if the partnership has let residential properties, then this will be treated as a residential property of the partner, so that the 3% SDLT surcharge will apply to the partner’s purchase of a personally owned residential property.
It would be far better if a more purposive approach to the 3% SDLT surcharge could be adopted, perhaps ignoring let residential properties within partnerships where the gross rental income is below a de minimis threshold. This measure will impact adversely on many farming partnerships where a partner (or their spouse) acquires a let residential property off the farm and may lead to partners “retiring” from the partnership for a period whilst they acquire their let residential property.
Following the July 2015 Budget proposal to allow landlords of all residential property (including unfurnished) to deduct the costs that they actually incur, the Finance (No 2) Act 2015 introduced a new “replacement furniture relief” from April 2016. For furnished properties, this replaces the previous 10% wear and tear allowance, but for unfurnished properties this broadly restores the position to that existing before April 2013, when the “renewals basis” was withdrawn.
From April 2013 we have continued to claim the cost of renewals for unfurnished properties using the statutory renewals allowance on the cost of replacement of “white goods”, carpet etc on behalf of clients. To coincide with the introduction of the replacement furniture relief from April 2016, HMRC are now abolishing the statutory renewals allowance.
Although the effect of this is likely to be small, it will mean that the cost of replacement items in communal areas will need to be claimed under the capital allowances system, as replacement furniture relief is only available on the replacement of domestic items for use in the residential property solely for the use of the tenant. As such, the replacement furniture relief will not cover the cost of replacing lawnmowers and other tools used by the landlord in maintaining the residential property.
Extension of farmers averaging period
As announced in the July 2015 Budget, from April 2016 farmers will have the choice of averaging their profits for income tax purposes over two years (as currently) or five years. This may well be advantageous for some farmers, but the change will not have practical effect until the 2017 tax return is submitted because of the way in which the benefit of averaging is claimed under the self assessment system (by a claim on the tax return and not an earlier stand-alone claim).
As expected Class 2 National Insurance Contributions (NICs) payable by the self-employed will be abolished from April 2018 (giving an annual saving of £145 based upon 2015/16 rates). However, Class 4 NICs will be reformed following the abolition of Class 2 NICs, so this may not be as generous as it appears.
Significant changes that have already been announced
From April 2016 the dividend tax credit will be replaced by a £5,000 tax-free dividend band.
Above this tax-free dividend band, the rates of dividend tax will be set at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
This benefits higher rate taxpayers who only receive modest dividend income outside ISA portfolios, but will increase the tax payable by individuals who use personal companies to receive dividend income rather than earnings (liable to National Insurance).
Pension tax relief
From April 2016 Income Tax relief on pension contributions will be tapered for those with annual incomes (including employer’s pension contributions) over £150,000. For every £2 of income over £150,000, an individual’s Annual Allowance, the limit on the amount of tax relieved pension saving that can be made, will be reduced by £1, down to a minimum of £10,000.
Tax relief on interest on borrowings for residential rental businesses to be restricted
From April 2017 only basic rate Income Tax relief will be available on loan interest paid in residential rental businesses (other than furnished holiday lets), with the restriction in relief being phased in over four years. This will impact on many farming businesses, where borrowings have been restructured to set loan interest against rental income, away from the farming business where profits are more variable, and the restriction will apply to partnerships and settlements where there is income from residential properties, as well as individual landlords.
It is unclear how relief will be restricted where there is a mix of residential and commercial property, although this is likely to be on a just and reasonable basis.
Inheritance tax threshold
From April 2017 there will be a new main residence nil rate band worth up to £175,000 per individual (£100,000 in 2017/18, £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21), which will be transferable between spouses. The new main residence nil rate band will also be available for those who “downsized” after 7 July 2015 when assets of an equivalent value, up to the value of the main residence nil-rate band.
The main residence nil rate band will only be available if the residence is left to one or more direct descendant on death (or settlements for direct descendants). There will also be a tapered withdrawal of the main residence nil rate band for Estates with a net value of more than £2 million.
The existing nil rate band will remain at £325,000 until the end of 2020/21.