OTS review of CGT will have implications for farm tax planning

18 Aug 2020

tracks in field

The Chancellor of the Exchequer has requested that the Office of Tax Simplification (OTS) undertakes a review of the capital gains tax (CGT) regime.

Any changes to CGT could impact on tax planning and succession for many farming and rural businesses, says Martyn Dobinson, a partner and a member of Saffery’ Landed Estates and Rural Business Group. He comments:

“The OTS review is intended to determine whether the current rules and regime are fit for purpose, and to identify any opportunities for simplification. CGT is a complex area, with numerous reliefs available.

“Many owners of farming and land based businesses will have taken advantage of some of these generous reliefs, such as rollover relief, where proceeds and gains arising on the disposal of one business asset are ‘rolled over’ into the base cost of a new replacement asset, and ‘holdover’ of gains, which works in a similar way when business assets are gifted.

“We’ve already seen some significant changes to Business Asset Disposal or Entrepreneurs’ Relief in recent times, with an increase in the ownership period requirement from one year to two years. The lifetime allowance for qualifying gains was also reduced from £10 million down to just £1 million in the Budget earlier this year. These changes have certainly made it more difficult to benefit from this relief.

“CGT is a key consideration in many areas for our rural clients. Particularly the structuring of ownership and deals around development land sales, including straight land disposals, options and promotion agreements, and in succession planning and handing down assets and businesses to the next generation. Any changes to the CGT regime will significantly impact on tax planning and will be of keen interest to us and our clients.

“For assets acquired before 31 March 1982, acquisition cost is replaced by the value of the asset at 31 March 1982 in determining the capital gain. This is an important concept for assets used in farming businesses, where the business and assets have been in the family and passed down for generations. The value of this re-basing of asset ‘cost’ decreases as time moves on. Land and property assets typically increase in value and the capital gains therefore increase. We expect that the OTS review will look closely at this ‘31 March 1982’ re-basing.

“There also continues to be a tightening of the net around gains made by property investors, particularly on residential property. Gains arising on the sale of residential properties, where not covered by a relief such Private Residence Relief, now need to be reported to HMRC, and the tax paid, within 30 days of completion. Previously the gains would have been reported and the tax paid through the normal self-assessment system. In the most extreme of cases, the tax wasn’t paid until 22 months after the sale. The thought process is obvious.”

“Whilst a wholesale overhaul of the CGT regime seems unlikely, there is no doubt that the application of the rules and reliefs to the sale and transfer of assets is complex, and that there is clear scope for simplification. There has certainly been a clear direction of travel on CGT in recent times. We encourage a simple CGT regime that collects tax fairly and accurately, but that must not come at the cost of penalising investment, genuine business endeavours and the future viability of long-standing family enterprises.”