Farmers thinking of disposing of an investment asset have been advised to take steps now in order to avoid a potential hike in Capital Gains Tax.
The new coalition government has stated that it intends to increase the CGT rate for “non-business assets” from the current 18% to rates similar to those applied to income – up to 40% or even 50%. Changes could be included in the government’s emergency Budget on 22 June.
Farmers should therefore consider “crystallising” capital gains now – whether in the form of a sale or gift – to lock into the potentially lower tax rate, Mike Butler from Old Mill accountants advised. “If you are planning to sell an asset in the coming years, it could be worth gifting it to a trust to crystallise the capital gain now, to reduce the liability on its ultimate sale.”
Although the gift to the trust triggers CGT, the tax should be at the rate pertaining at the time of the transfer, David Maddock, an associate at Clarke Willmott solicitors said. Any increase in the value of the asset from the date it is gifted to the trust to the date of its eventual sale would be subject to the new CGT rate, he said.
Those with loss-making assets such as milk quota should defer crystallising the loss until the envisaged higher tax rate comes in, to make better use of their loss relief, Mr Butler added. “For example, a farmer with £150,000 of milk quota losses could claim £15,000 of CGT saving now under the existing 10% Entrepreneurs Relief. But if they delayed that sale until after the Budget, the same quota could yield a £60,000-£75,000 saving under a possible 40-50% tax rate.”
Mr Maddock reckoned gains realised by agricultural landlords were likely to be especially vulnerable to the increase in the CGT rate, while those realised by working farmers might qualify for Entrepreneur’s Relief, and be taxed at a lower 10% rate.