Following the reduction in the lifetime limit of Entrepreneurs’ Relief in the recent Budget, how will UK farmers looking to pass farms down the generations during lifetime or sell to get out of the industry altogether be impacted?
ER and the lifetime limit
ER was introduced in April 2008 as an incentive for individuals to establish businesses in the UK and drive ‘entrepreneurism in the UK’ in response to the economic downturn. It was initially envisaged that through facilitating entrepreneurs, entrepreneurial culture was to be given a boost, which would eventually contribute towards the creation of more job opportunities and the acceleration of economic growth.
When initially introduced, the relief provided that on disposal of the whole or part of your trading business, or on disposal of shares in your personal trading company, the rate of capital gains tax (CGT) was reduced to 10% (originally from 18%/28%) on qualifying disposals, subject to a lifetime limit.
The lifetime limit was originally set at £1 million, but this was increased in April 2010 to £2 million, increased further to £5 million in June 2010 and then finally increased to £10 million in March 2011. The lifetime limit remained at this level until March 2020 when the Chancellor reduced this back to £1 million for prospective transactions .
Capital gains tax impact on UK farming
Farming in the UK has always been seen as a ‘family business’ with many farms boasting several generations at the plough.
When a farming business is gifted in its entirety to the next generation during the lifetime of the current farmer, this is a disposal for CGT purposes . A gift is deemed always to take place at market value, so if the valuation of the farming business gives an increase in value, over the farmer’s acquisition value, he may be liable to CGT on this increase. While there are some further reliefs possible, for example gift holdover relief, the family may prefer some certainty over the CGT liability now rather than an indeterminable rate in the future.
There is likely to be a gain given the average worth across all UK farms of £1.82 million as announced recently in the Department for Environment Food & Rural Affairs’ recent farming performance overview for 2018/19 .
In recent years, the gain would have likely qualified for ER, at least in some part. However, with the reduction in ER to £1 million, many farming families could see their CGT exposure increase dramatically with an additional 10% payable on any of the gain over this lifetime limit. With some farming businesses being run through unincorporated entities or LLPs they may see a capital gains tax increase of up to 18% on the gains on some assets.
It should be noted that the reduction in the lifetime limit takes into account any disposals that had previously used some of the lifetime limit. If a farmer had already used some of his ER limit of £1 million in a previous tax year then the ‘clock’ is not reset and no ER would be available for this disposal now.
This reduction in the lifetime limit will also impact farmers who may be looking to get out of the industry given the withdrawal of farming subsidies under the Agriculture Bill and a change to support in the form of Environmental Land Management Scheme (ELMS). While the detail is still not available, some farmers may see the transition to ‘natural capital’ under ELMS putting too much strain on the business to comply, so selling the business might benefit families better instead.
Any farmers with areas of development land are also likely be affected by this change. Any farmers who may be considering gifting their farming business to other family members or selling to a third party and wanting to know more about the potential tax impacts should contact Lee Webster at email@example.com.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.