Budget Update

The Spring Budget contained more surprises than initially anticipated and there were many announcements that will affect farming and rural businesses.

Extension to Agricultural Property Relief from 2025

The headline announcement for farmers was that, after successful CLA lobbying, land managed under a qualifying land management scheme will qualify for Agricultural Property Relief (APR) for Inheritance Tax (IHT) purposes.  This is welcome news and provides clarity to farmers taking land out of crop production in favour of a land management scheme. 

While this is not set to form part of the next Finance Bill, the Government has confirmed that with effect from 6 April 2025, APR will be available for land managed under an environmental agreement with, or on behalf of, the UK government, Devolved Administration, public bodies, local authorities, or approved responsible bodies.  Therefore, this will not solely be restricted to the Environmental Land Management Scheme (ELMS) already available to enter into, and could cover any equivalent scheme, so long as the body providing the scheme is an approved party.    

There are, of course, some restrictions to benefiting from APR on land put into environmental land management, as follows:

• The land will only qualify for APR with effect from 6 April 2025 so long as, for two years prior to being put into a qualifying land management scheme, the land was used for agricultural purposes.  Therefore, if land is already under ELMS, and was used for agricultural purposes for the two years prior, it would immediately qualify for APR on 6 April 2025.  Landowners who have not held land for agricultural purposes for two years prior, would not be able to simply enter into a scheme and obtain APR on this land.  
• As this only comes into effect from 6 April 2025 for lifetime and death transfers, land held under ELMS gifted prior to this, would not have the benefit of APR on the gift (unless the land would qualify in its own right, as being used for agricultural purposes).

Edging closer to guidance on the tax implications of entering into Ecosystem Service Payment agreements?

As of 12 February 2024, Biodiversity Net Gain (BNG) is now compulsory on all major developments, with small developments and nationally significant infrastructure projects being caught from 2 April 2024 and November 2025 respectively.  With the approach of this new legislation, there has been a general increase in rural businesses being approached for BNG and Carbon sequestration offsetting purposes, however HMRC has refrained from commenting on the tax treatment of such eco credits, which means the treatment is generally unclear.

HMRC, the Treasury and Defra, alongside industry representatives, will seek to clarify the tax treatment.

Furnished Holiday Lets abolition

In a blow to many rural businesses, the Furnished Holiday Lets (FHL) tax regime will be abolished with effect from 6 April 2025. 

Historically, FHLs have been treated as a trade for income tax and capital gains tax purposes, and an investment activity for IHT purposes, unless sufficient additional services were provided (akin to a hotel) enabling it to qualify for Business Property Relief (BPR). 

With these changes, there will be many common planning points lost and some unanticipated tax issues, such as:

• FHL profits will no longer qualify as relevant earnings for pension contribution purposes, meaning many individuals could face being unable to make contributions in excess of the standard net amount of £2,880 if the main trade makes a loss.

• With many rural businesses running FHLs with additional services in a bid to obtain BPR, this could be in jeopardy. There may be some potential to pursue treating the former FHL as serviced accommodation to retain the trade status, however this will most likely be a point for the Courts.

• FHL businesses have also been able to benefit from Capital Allowances, so there may be some balancing charge implications on the cessation of the FHL regime.

• Where a mortgage had been secured on a qualifying FHL property, mortgage interest was relievable in full. Now that FHLs will fall into the general rental property regime, mortgage interest will be restricted to a basic rate tax reducer.

• CGT planning opportunities will be lost, as the ability to roll over into FHL property will disappear, and the sale of an FHL will no-longer qualify for Business Asset Disposal Relief.

One benefit, however, will be that reporting of property income will be more straightforward from 2025-26 onwards, as there will be no need to ringfence FHL losses.

Top rate of residential CGT reduced to 24%

Leading on from the above, another announcement was the reduction in the top rate of residential CGT from 28% to 24% with effect from 6 April 2024.  The lower rate will remain at 18%.  If you are in the process of selling a property, you may wish to hold off on exchanging (as exchange is the date of sale for tax purposes) until after 6 April 2024.

Remember that when selling residential property, you may be required to complete a standalone CGT return within 60 days of completion.

National Insurance changes from 6 April 2024

In a welcome boost to the self-employed, the main rate of Class 4 NIC will be 6% with effect from 6 April 2024.  This comprises of the 1% cut announced in the Autumn Statement and a further 2% cut announced in the Budget.

Furthermore, with effect from 6 April 2024, the requirement to pay Class 2 NIC will be abolished and anyone with trade profits above the small profit threshold will automatically receive a qualifying year for state benefit purposes. Anyone with trade profits below the small profit threshold can voluntarily pay Class 2 NIC to secure their qualifying year.  The easiest way to see your current number of qualifying years is to view your Personal Tax Account.

Employees will also benefit from a further 2% NIC cut with effect from 6 April 2024, on top of the cut that came into effect in January 2024.