How will Capital Gains Tax changes impact farm businesses?

While the 2024 Autumn Budget contained the bombshell announcement on Inheritance Tax (IHT), which has dominated the news agenda since, there were other announcements that will impact farmers, including increased Capital Gains Tax (CGT) rates.

Rates of tax

Prior to the Budget there were rumours of significant increases in the rate of CGT, even to introduce a top rate of 40%. The previous government reduced the top rate of CGT on residential properties from 28% to 24% in April 2024, while leaving the top rate on land and other assets at 20%. The lower rates, paid by basic rate taxpayers were 18% on residential properties and 10% for other assets.

The rates on residential properties remain unchanged, but the Chancellor announced increases to CGT rates on other assets to 18% and 24% respectively. Hence, we are back to the position that existed before 2016 where residential properties are taxed at the same rate as land and other assets.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) gives business owners a lower rate of CGT on qualifying gains. Before 2020, a person could make lifetime gains of up to £10 million and pay 10% CGT. The lifetime limit was then reduced to £1 million per individual, and the maximum saving was reduced from £1 million down to £100,000.

The Chancellor has left the £1 million lifetime allowance unchanged, but the rate of CGT on qualifying gains is increasing to 14% on 6^th April 2025 and again to 18% on 6^th April 2026.

Hence, a farmer contemplating a retirement sale which will realise a £1 million gain will see their CGT liability increase by £40,000 on 6^th April 2025, and by another £40,000 on 6^th April 2026. From 2026 onwards, the maximum saving of BADR (per individual) will be £60,000.

Holdover relief on gifts

Holdover relief allows assets to be gifted without incurring a CGT liability. It is important to remember that this is a deferral of CGT rather than an absolute saving. The recipient of the gift is deemed to have acquired the asset at the base cost of the person making the gift. If the person making the gift had owned the land for many years, the difference between base cost and current market value will be significant. This contrasts with inherited land, where the base cost is the market value at the date of death.

There were no changes to holdover in the Budget, but as a result of the changes to IHT, most farmers will be looking at lifetime gifts of land as a way of reducing their exposure to IHT. If any of this land is sold in the future, the CGT liability will be much higher than if it had been inherited.

Sales of residential properties

As mentioned earlier, the rate of CGT payable on residential properties is now the same as on land and other assets. However, it is still necessary to calculate the gains separately, as residential property gains need to be reported to HMRC, and the CGT paid within 60 days of completion.