What’s ahead for farm tax in 2020?
As we approach the end of another tax year, it seems like a good time to look at the tax changes already announced for the year and also speculate on what could be introduced in the coming months.
2019 was unique to recent years, in that due to the political upheaval caused by Brexit, we did not have a Budget. This thankfully meant that we have had fewer changes in legislation to cope with, but we have a Budget scheduled for 11th March and the Conservative Party election manifesto gives us a few clues about what might be announced.
Tax on profits and income
- The Conservative Party manifesto pledged not to increase income tax rates. At present an individual has a personal allowance of £12,500 and a basic rate band of £37,500. This means a person can earn £50,000 before the rate of tax increases from 20% to 40%.
- The rate of Corporation Tax on company profits had been due to reduce from 19% to 17%, but this has been shelved and the rate will remain at 19%.
- Similarly there was a pledge not to increase National Insurance Contributions (NIC’s). There is also an aspiration to align the National Insurance threshold (currently £8,632) with the personal allowance of £12,500. As a first step the threshold is expected to rise to £9,500 on 6th April 2020 which will save a self-employed person about £1.50 per week.
- It seems likely that self-employed individuals will continue to pay both Class 2 and Class 4 NIC’s. There was a plan to abolish Class 2 NIC’s (current cost £3 per week) in 2018 and increase Class 4NIC’s. This would have made qualifying for a full state pension much more complicated for self-employed people on low profits.
Tax relief on capital expenditure
- Most businesses can currently benefit from a temporary increase in the Annual Investment Allowance (AIA) which allows 100% tax relief on the purchase of up to £1 million of machinery and equipment.
- This temporary increase is due to end on 31st December 2020 with the AIA limit returning to £200,000. For businesses that don’t have a December accounting year end, the AIA limits are apportioned. For example a business with a 31st March accounting date will have a limit of £800,000 in the year to 31st March 2021.
- Any business that traditionally leaves asset purchases to the end of their accounting period need to be aware of a peculiarity in the legislation. This restricts the amount of expenditure after 31st December 2020 which qualifies for AIA. In the example above, a business with a 31st March year end can only get AIA on £50,000 of expenditure in the period 1st January 2021 to 31st March 2021.
- Until October 2018 there was no tax relief on the cost of a basic farm building. The Structures and Buildings Allowance (SBA) was introduced which gives a flat rate of 2% tax relief for 50 years on expenditure incurred after 29th October 2018. The Conservative party manifesto pledged to increase this to 3% but we will need to wait for confirmation of this in the budget on 11th March.
Capital Gains Tax
There was no pledge in the Conservative party manifesto regarding rates of Capital Gains Tax (CGT) so there could be changes. At present, rates vary from 10% to 28% depending on the type of assets sold and the level of a person’s income. Residential property is currently taxed at higher rates than other assets.
Where business assets are sold, the availability of Entrepreneurs’ Relief can reduce the rate of CGT to 10%. This is an extremely complicated relief and both the Conservative and Labour parties pledged to reform or abolish it in their manifestos. We are therefore expecting an announcement on this in the Budget.
There is another practical change being introduced on 6th April 2020 which property owners need to be aware of. Currently a capital gain on the sale of a residential dwelling is entered on a Self Assessment Tax Return and the tax is paid on 31st January following the end of the tax year. For sales of residential property completing on or after 6th April 2020 it will be necessary to notify the sale and pay the tax to HMRC within 30 days. This will require farmers to plan ahead to ensure they have all the information needed to calculate the gain before the sale completes.
There was no mention in the Conservative manifesto regarding Inheritance Tax (IHT) but the previous Chancellor of the Exchequer commissioned a report from the Office of Tax Simplification regarding the operation of IHT. This reported in the summer of 2018 with a number of recommendations, which we covered in these pages last year. It will be interesting to see if any of these are implemented in the Budget.
In particular, restrictions on Business Property Relief for non-agricultural assets and the CGT treatment of inherited assets could both adversely affect farming businesses.