Taxation: Where there’s relief, there’s a way
The focus of the TRIG Tax Working Group (‘TWG’) was to focus on the potential for taxation reform to improve both the “who” and the “how” of farming by encouraging:
- the flexible movement of land into the occupation of those best suited to improve productivity and innovation, in part using this as a means for retirement
- productive investment, especially in new technologies
- diversification of land use by removing the obstacles in the taxation system.
The ownership of farmland and its use have been diverging for decades and that trend seems set to continue. Therefore tenancies which facilitate productive use of farmland, efficient succession and which can offer tax efficient solutions to landlords, will help to improve the let sector.
The key measures that the TWG have proposed are summarised below:
Limited Income Tax Relief on farm land rents
This tax relief is designed to encourage letting, and letting for longer periods, by proposing a relief from Income Tax at the basic rate for new lettings to unconnected parties, with ceilings of:
- £7,500 for land let for five years or more
- £15,000 for land let for ten years or more
The new Residential Nil Rate Band Amount provides a more secure Inheritance Tax (IHT) relief for farmhouses passed down the family than the traditional Agricultural Property Relief (APR). Therefore this proposal could offer many farmers an attractive retirement package and see land move into new hands without the fear of a loss of tax relief on the farmhouse. Evidence from Ireland shows that this type of limited income tax relief can have a significant impact.
Where the intention is for a farming business to remain in the family, an alternative tax relief may be required as part of this policy, as this limited income tax relief is intended for new lettings to unconnected parties.
Capital allowances to support investment
New investment will be critical to ensuring improved productivity in farming going forward and the TWG proposed a number of recommendations in this area:
- the ability to carry forward unused parts of the Annual Investment Allowance
- a 100% allowance for those investing in new digital and emerging technologies for farming
- an enhanced allowance for research and development projects
- a review and expansion of Enhanced Capital Allowances for environmentally beneficial technology
- a restoration of the agricultural building allowance
- a recognition of off-farm investment e.g. storage.
The TWG consensus is that landlords and tenants would make better investment decisions where supported by tax reliefs rather than grants.
VAT – raise the de minimis threshold for partial exemption
The current EU rules framing VAT will no longer restrict the United Kingdom after Brexit and therefore the TWG have agreed that the de-minimis exception for partial exemption be reviewed.
Partial exemption is a complex area of VAT for single businesses that provide both VAT-able and exempt outputs, which is often a consequence of diversification of farming activities. The de-minims of £7,500 under which all VAT on inputs can be recovered has been in place since the 1970’s so catching more and more people and restricting the VAT they can recover. The group proposes that this limit be raised substantially after Brexit.
Recognising a business with multiple trades
The TWG endorsed a holistic approach for businesses with shared overheads, including property income as well as a diverse portfolio of trades, thereby removing a barrier to letting. The whole business would be reviewed as a single trade for Income Tax purposes under this proposal.
Rollover Relief to allow reinvestment in improvements to let farmland
The current incarnation of Capital Gains Tax Rollover Relief does not allow relief on reinvestment in let land and the working tax group have recommended that the list of qualifying assets should be amended to allow this. This would help to support investment in the productivity of let land.
Stamp Duty Land Tax (SDLT) – exempt all leases of agricultural property
This recommendation would address a deterrent to a tenant taking a longer lease, where they will incur a punitive SDLT charge and it should therefore facilitate longer lettings.
APR to be available on land let for less than a ten year term
The Tenant Farmers Association proposed to restrict the generous 100% APR only to those landlords prepared to let farmland for periods of ten years or more.
However the TWG does not recommend that this restriction be adopted, after reviewing modelling which suggested that it would create a strong polarisation and tension between private landlords, who would want to achieve full APR relief, whilst also retaining flexibility and a sense of control. Indeed the modelling suggested that 33% of lettings and 25% of land would leave the let sector if this change was implemented.
The TWG expressed concerns that an erosion of flexible terms would reduce opportunities for potential entrants and the ability for the industry to be adaptive in its use of land when responding to challenges in the future.
The TWG have advised DEFRA that the greatest opportunities to improve farming productivity using the let sector lie in:
- an effectively designed Income Tax relief on farm rents
- an improved capital allowance regime for farming businesses and landlords.
They concluded their report with the following:
“If we can unlock and enable a larger let sector that promotes good farmers who can invest and adapt flexibly to change and deliver innovation we will have achieved a lasting benefit for agriculture.”
It remains to be seen which, if any of these recommendations are taken on board by ministers at DEFRA.