Despite widespread speculation on likely changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT) the Chancellor refrained from any reform of these taxes in 2021. Some commentators have been predicting increases in tax rates based on the need to repay Government borrowing incurred during the pandemic. Others based their predictions on recommendations made by the Office of Tax Simplification (OTS). The OTS is an independent body which, as the name suggests, is tasked with suggesting ways of making the tax system simpler.
Before the Covid-19 pandemic struck, the OTS had produced reports into both IHT and CGT that could have impacted on farmers and rural businesses:
To increase the rates of CGT so that they were more closely aligned with Income Tax rates. This was obviously a big worry for anyone planning to sell property and make capital gains.
To simplify the calculation of capital gains by rebasing the cost of property from its original cost to its value in 2000.
To reintroduce indexation, which allowed individuals to increase the cost of assets by inflation, which was scrapped in 2008.
If all three of these changes had been made, there would have been winners and losers among farmers selling land.
Probably the biggest change to CGT was the recommendation that the “tax-free uplift” on death for inherited assets would be removed. This would have reduced the benefit of farmers hanging onto assets and passing them to family on death.
It was therefore a surprise that there were no changes to either CGT or IHT in the 2021 Autumn Budget. The position has been clarified by the publication of a letter from HM Treasury to the OTS on 30 November 2021.
Inheritance Tax
The Treasury confirmed it had “decided not to proceed with any changes at the moment”.
It pointed out that 94% of estates do not pay IHT, despite the tax expected to raise £6 billion in the current year.
The Chancellor had already announced that the nil-rate band of £325,000 is to be frozen at its current rate of £325,000 until at least 2026. Increased property values mean that IHT revenues are likely to rise significantly without the Chancellor making any further changes.
Capital Gains Tax
The Treasury commented on the “additional administrative burden on HMRC” that would arise from the OTS proposals.
It went on to say that while the system would be kept under constant review, no major changes would be made at the present time.
The Treasury did however announce five minor changes and confirmed it was considering implementing five more OTS proposals. None of these will greatly impact farmers or landowners when selling or gifting assets.
It is noteworthy that the Treasury did not commit to maintaining the status quo for any particular period, so it is still possible to make changes in the next couple of years. However, traditionally a Chancellor does not announce tax rises or other bad news in the lead-up to a General Election. It is therefore unlikely that there will be any radical changes before December 2024. This does not mean that farmers can relax and forget about tax planning for the next few years. There are often sound commercial reasons other than tax for undertaking succession planning.
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