The impact on farming and rural businesses following the Spring Budget

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 headliner announcement for farmers is 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 very welcome news and provides much needed clarity to farmers taking land out of arable 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, as part of their consultation response released with the Budget, that with effect from 6 April 2025 Agricultural Property Relief 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 ELM schemes already available to enter into and, rather than the very limited list of specific habitat schemes which previously qualified for IHT reliefs (which will be repealed as part of these measures), it could cover any environment land management scheme, so long as the body providing the scheme is an approved body.     

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 2 years prior to being put into a qualifying land management scheme, the land was used for agricultural purposes.  Therefore, if land is already in an ELMs scheme, so long as for two years prior to being put into the scheme it was used for agricultural purposes, it would immediately qualify for APR on 6 April 2025.  Similarly, the Government have indicated that landowners who have not held land for agricultural purposes for 2 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 in an environmental land management scheme gifted prior to 6 April 2025 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 still).

Edging closer to guidance on the tax implications of entering into Ecosystem Service Payments 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 uptick in rural businesses being approached for BNG and Carbon sequestration offsetting purposes, however a common element has been that HMRC has refrained from commenting on the tax treatment of such eco credits, which particularly for sole trader and partnership businesses has meant the treatment is generally unclear.

Therefore, as part of the consultation response issued with the Budget, HMRC, the Treasury and Defra will seek to clarify the tax treatment as part of a joint working group with industry representatives.  Of course, as there is an approaching election, it remains to be seen whether there will be any meaningful progress on this to address the uncertainty.

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. 

FHLs have occupied a strange place in our tax legislation with them historically being 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) to tip the activity into qualifying for Business Property Relief. 

With the abolition of the FHL regime, 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 and they have no other source of earnings.

• With many rural businesses running FHLs with additional services in a bid to obtain Business Property Relief when reviewing the Balfour position of the farm, this could be under further 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 to determine.

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

• 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.

• Most importantly the loss of FHLs will be felt in CGT planning opportunities as no longer will there be the ability to rollover into a property that will be run as a FHL, and neither will the sale of a FHL qualify for the advantageous 10% Business Asset Disposal Relief rate of tax.

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

Top rate of residential CGT reduced to 24%

Leading on from the abolition of FHLs, one of the big Budget announcements was the reduction in the top rate of residential CGT from 28% to 24% with effect from 6 April 2024.  The lower rate of residential property CGT will remain at 18%.  Therefore, 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 the end of the current tax year.

Please remember that if you sell a residential property, you may be required to complete a standalone CGT return within 60 days of completion.  If you think this may apply to you, please contact one of the team.

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.  If you would like details on how to set this up, please contact a member of the team.

Employees will also benefit from a further 2% NIC cut with effect from 6 April 2024, on top of the cut to Class 1 NIC that came into effect in January 2024.

Full expensing for leased assets

One further point to note in this year’s Budget is that the Chancellor announced he will look to extend  full expensing to also encompass leased assets “when fiscal conditions allow”.  No draft legislation has been produced so far on this point and so we will need to wait to find out if anything arises on this in the future.

Double Cab Pick Up handbrake turn

While published before the budget, again it is worthwhile highlighting that double cab pick ups will continue to be treated as a van for tax purposes, rather than a car.   Please see our article “Double cab pickup trucks – is your business going to be affected?” where we discuss this in greater detail.