The Chancellor trumpeted this as a Budget for stability and sustained economic growth, but it appears to be a Budget for helping families and targeting complex tax anti-avoidance.
In depth …
The Chancellor proposed no increase to the corporation tax rate and bands, while personal allowances are to increase in line with inflation.
There was also no extension of the 50% first year allowance for plant and machinery purchased by small businesses (available on expenditure before Mar 31, 2005), although the 40% first year allowance will remain available to small and medium businesses.
A welcome comment was that the new HMRC (Revenue and Customs) will introduce a risk-based approach for inspections, which will hopefully produce a light touch for low risk businesses.
The Chancellor also promised “access to coordinated, clear and helpful support”.
Entitlement to Single Farm Payment
Although we still await general guidance on the tax treatment of single farm payment, the Chancellor confirmed that entitlement to SFP will be treated as an intangible asset for corporation tax purposes from Mar 22, 2005, when the new capital gains tax rollover relief provisions become available for farmers trading as sole traders, partnerships or trusts.
This means when companies purchase entitlements, they will be able to write off the cost against their profits over the period to 2012.
Of small comfort to “Middle England” are the long overdue, above-inflation increases in the inheritance tax thresholds.
The threshold will rise to £300,000 by 2007/08 (£275,000 in 2005/06 and £285,000 in 2006/07).
Although welcome, this is of limited benefit, as it mainly applies to farmers who have diversified out of farming and have converted buildings to residential or commercial lettings, which do not qualify for the inheritance tax reliefs traditionally available on farms.
As previously announced, an income tax charge will apply from Apr 6, 2005 on assets that have been gifted out of a farmer‘s estate (“pre-owned asset” tax charge) where the farmer continues to enjoy the asset.
This income tax charge will apply to assets gifted since Mar 18, 1986 (when inheritance tax was introduced).
It had been hoped that there might be some further concessions on the pre-owned asset tax charge, but there have only been further regulations advising technical calculation issues.
Importantly for farmers, the pre-owned asset tax charge will not apply where the farmer making the gift continues to enjoy the use of the asset, but the enjoyment is consistent with their retained ownership of the property.
For example, if a farmer gifts a 50% interest in his farm to his son, and he continues to farm the land as a 50% partner in partnership with his son, then no tax charge arises.
The tax charge is also mitigated by any rent paid for the use of the asset and is subject to a ‘de minimis‘ threshold under which the tax charge will not arise.
The ‘de minimis‘ threshold has currently been set at £5,000 per year.
Duty on biofuels such as bioethanol and biodiesel will continue at 20p/litre below man road fuels. This has been guaranteed until at least 2007.
However, the rate of duty will be increased by 1.22p/litre from Sept 1, 2005, as will excise duty rates on the main road fuels and the duty on red diesel, which increases to 6.64p/litre.
There have been no significant changes to VAT that have a direct effect on the farming industry.
The annual turnover limit for registration has increased from £58,000 to £60,000.
As usual, changes in fuel scale charges have been announced and businesses must use the revised rates from the start of their first accounting period beginning on or after May 1, 2005.
Stamp Duty Land Tax
This tax was introduced to replace Stamp Duty from Dec 1, 2003.
The threshold at which SDLT starts to be paid on residential property increases to £120,000 (previously £60,000). The threshold for commercial property remains unchanged at £150,000. SDLT is therefore payable on transfers of residential property/commercial property where the market value is:
more than £120,000/£150,000 1%
more than £250,000 3%
more than £500,000 4%
Partnership transactions have been caught since July last year where a charge potentially arises on:
the transfer of land by a partner into a partnership
change in income profit sharing ratios within a partnership
the transfer of land out of a partnership
Clarification has long been awaited on how the Inland Revenue intend to apply the legislation where no cash changes hands but there is the assumption of some form of debt over the land.
Whilst further clarification is awaited, in the Budget it has been made clear that there will be a charge on partnership transactions where land is transferred into a partnership and the transferor takes money out of the partnership within three years.
Capital Gains Tax
The rates of capital gains tax for individuals has remained unchanged and the annual exemption has increased to £8,500 (£8,200 for 2004/05).
There has been further anti-avoidance legislation targeted at specific schemes, but this is not expected to affect normal transactions by farmers.
As part of his programme to modernise the tax system for trusts, the Chancellor announced the introduction of a standard rate band for those trusts that pay tax at the rate applicable to trusts.
As expected, the new rate will apply from Apr 6, 2005 and will charge the standard rate on the first £500 of income.
A further specific proposal announced in the Budget affects trusts where the residence of trustees changes. This will only affect trusts which seek to exploit the terms of certain double taxation agreements to avoid UK capital gains tax and is therefore of only limited relevance.
More changes to the taxation of trusts are anticipated in the future but these are still the subject of consultation. The Inland Revenue is to carry out further development work on these matters prior to publishing draft legislation for consultation later this year.