Retire now or in a decade
Farmers thinking about
selling up and retiring are
advised to do so soon – or
farm for another decade.
Robert Harris reports
A CLOSE study of Gordon Browns capital gains tax reforms in last weeks Budget shows all but the wealthiest farmers will pay more tax over the next few years when selling business assets.
Worst affected are those with business assets worth less than £250,000, which contain no base value – the most obvious being milk quota.
Under current rules, capital gains tax, which charges tax on asset value at the sellers top rate of income tax, is largely offset by an indexation allowance, says Ray Symons of the UK 200 Agriculture Group. Simply put, only the amount of gain which exceeds inflation is taxed.
But an asset needs a base value to qualify. Base values are set at 1982 levels – two years too early for milk quota, which was introduced in 1984. That means the whole asset becomes liable to tax – for a higher rate tax payer, that would be 40%, he explains.
However, dairy farmers have been able to reduce or eliminate that charge using retirement relief. This relief, available for those aged 50 and over who sell at least part of their business, exempts the first £250,000 of gains from CGT, and half the next £750,000.
Unfortunately, the chancellor is phasing out retirement relief over five years from Apr 1999 (see Table 1). It will be replaced by a taper, which ignores a % of the gain for tax purposes. High initial levels of tax are set, which gradually reduce to 10% after 10 years or more of asset ownership (see Table 2).
For example, on a gain of £100,000 on business assets held for five years, 62.5% of the gain is taxable. A higher rate taxpayer would pay 40% of £62,500, or £25,000.
The catch is that assets held on or before Budget day only qualify for one year of ownership, regardless of how long they may have been held, says Gary Markham of accountants Grant Thornton.
At first glance, that would suggest a huge leap in tax on assets sold in the next few years. However, retirement relief will partly offset that increase for the five years until it disappears. But the overall effect is still an upward trend in tax in the medium term (see graph), because taper relief climbs more slowly than retirement relief falls.
It is also worth remembering that even after 10 years, a farmer with £250,000 of gain will have to pay £25,000 under the new rules. For now, he can claim retirement relief on the lot.
"Broadly speaking, those with gains under £500,000 will generally be worse off under the new system. Those with higher gains will generally be better off, especially those with more than £2m who will gain over the whole period and be significantly better off at the end of it," says Mr Markham.
The worst period to retire will be in the tax year 2003-2004, Mr Symons notes. A dairy farmer retiring with a capital gain of £200,000 in May 2003 will have a tax liability of £44,000 (at 40% tax).
"The message is clear. If you want to retire and are certain that retirement relief is going to be avail-able, do it before Apr 1999," he says.
Other assets like land which is sold for development or amenity use will also suffer under the new rules. Agricultural land will not be affected to the same degree. The base value, established in 1982, has increased little in real terms.
However, since the indexation allowance will be frozen on Apr 6 this year, gains due to inflation will be liable to tax. Although that is not too serious at current levels, if inflation takes off again bills could mount, says Mr Markham.
• Those leasing out quota (classed as a non-business asset) for the next 10 years will be better off, says Grant Thorntons Vicki Oliver. If milk quota generating gains of £250,000 was leased out now the bill would be £100,000, since it attracts a 40% rate regardless of the length of time it has been held. Under the new taper, the equivalent tax rate falls to 24%, a payment of £60,000.
Table 1: Retirement relief
Year £ fully exempt
Source: Grant Thornton
Table 2: Taper system
No of complete % of Equivalent
years after Apr 5, gain tax rates*
1998 whole chargeable on asset
asset is held (higher/basic
0 100.0 40/23
1 92.5 37/21
3 77.5 31/18
5 62.5 25/14
7 47.5 19/11
10+ 25.0 10/6
* rounded up %
Source: Grant Thornton