Conservative Vs Labour

The government will call a general election later in the year, and the conservatives are currently trailing labour in the polls. Paul Harris, Tax Partner,  looks at some of the tax changes affecting farmers which may come about if a new government takes charge later this year. It is intended to spark further discussion rather than provide all the answers – it is about what could happen rather than what will happen.

There’s no doubt that farmers and landowners have been enjoying a particularly benign tax regime for many years now – particularly with regard to Capital Gains Tax (CGT) and Inheritance Tax (IHT). Indeed, it is nearly ten years since I gave a talk on capital taxes entitled “Make hay while the sun shines” – and I sincerely hope that readers have been doing just that, because we could soon be in for some stormy weather. And that’s not to mention all the other changes that continue to buffet the farming sector – Brexit, Ukraine, net zero: the list goes on…

So, Conservative vs Labour? To be honest, with Labour 25+ points ahead in the polls and odds-on favourites to win an overall majority at the impending general election, you could be forgiven for asking whether the Conservatives’ tax plans are even worth considering.

The Chancellor is due to present his next – and final? – Budget on 7 March, and the Conservatives have been testing the water with a few ideas – perhaps the most striking being the complete abolition of IHT. But even if they do make any dramatic changes – either on 7 March or, if Rishi Sunak puts off the evil day as far as possible, in one last throw of the dice in an Autumn Statement – Labour will interpret a (large) majority as a mandate to rewrite the tax rules as much as they like.

Labour have understandably been trying not to frighten the horses during the run-up to the election. For example, Shadow Chancellor Rachel Reeves has pledged not to raise Corporation Tax during the next parliament and has tried to stamp on rumours of swingeing cuts to IHT Agricultural Property Relief (APR) and Business Property Relief (BPR). But they will certainly be banking on at least two terms in power, and over time Keir Starmer may find it hard to resist the temptation (egged on by his more left-leaning colleagues) to shift more of the tax burden onto “the wealthy”. This is especially so because the requirement for record levels of tax revenue is not likely to recede any time soon.

In light of the above, I believe that some of the potential tax changes that farmers and landowners should be concerned about are:

• On owning land: “We have no plans for a wealth tax,” said Rachel Reeves last summer, but a lot could change once she has moved into Number 11. Readers with a long memory may recall Tony Blair’s “We’ve no plans to increase tax at all” shortly before New Labour swept to power in 1997. And there have recently been calls from the left of the party for a 1% – 2% annual wealth tax on assets over £10 million.
• On the disposal of land: In many cases holdover and rollover relief enable CGT on disposals of farmland to be deferred. It seems unlikely that rollover relief will be abolished, but any tightening of the rules for APR could restrict the availability of holdover relief. Labour might also change or abolish Business Asset Disposal Relief, which can currently reduce CGT by up to £100,000 over the course of a lifetime. They could also align CGT rates with income tax rates – a fairly straightforward change which would significantly increase the tax cost for those unable to hold over or roll over their gains.
• On passing land to the next generation: Changes to APR and/or BPR – for example, a tightening of the ‘Balfour’ rules which can enable 100% IHT relief to be claimed on diversified rural businesses – could force the break-up of family farms unable to fund the additional IHT cost, with landlords of tenanted farms probably most vulnerable here. We might also see the abolition of the CGT-free uplift to market value on death for assets which benefit from IHT relief (an idea mooted by the now-disbanded Office for Tax Simplification).

Finally, climate change and the pursuit of net zero are leading to new challenges and opportunities for the farming community, and for their tax advisers. In March last year, the government launched a consultation to look at:

1. The tax issues around carbon credits, nutrient mitigation and biodiversity net gain units
2. Potential changes to APR to address concerns that landowners could be put off entering into certain environmental schemes by fears that the change of use could jeopardise valuable IHT reliefs
3. Some of the suggestions from the 2022 Rock Review of tenant farming in England, including restricting the application of 100% APR to farm tenancies of eight years or more.

The consultation closed in June 2023, and it is disappointing that we have not yet heard the outcome, although that does at least suggest that these important issues are being taken seriously.

I believe that farmers and landowners are now entering a new period of fiscal uncertainty, against a backdrop of continuing economic, political and climatic change. The best they can do is to maintain a regular dialogue with their professional advisers, to avoid any looming tax pitfalls, and to ensure that they are best placed to enjoy whatever reliefs remain available until the political pendulum swings back the other way. To discuss your tax position and any changes that are announced in the 2024 Budget, please email hello@scruttonbland.co.uk or call 0330 058 6559.