A government-commissioned review has suggested a major overhaul of capital gains tax (CGT) that could leave landowners facing bigger bills.
The Office for Tax Simplification (OTS) review suggested that up to £14bn a year could be raised for the Treasury by removing exemptions and doubling existing CGT rates.
There are currently four different rates of CGT. For basic-rate income tax payers, CGT is 18% on second homes and buy-to-lets and 10% on other assets.
For higher-rate taxpayers, the equivalent rates are 28% and 20%.
However, the review recommended that the maximum 28% bracket could be raised to match income tax rates of 40% in England and 45% in Wales.
It also suggested scrapping a number of exemptions that limit tax bills.
Chris Thorpe, a tax partner with accountancy Moore Scarrott, set out scenarios whereby farm businesses could face tax hikes if chancellor Rishi Sunak decided to act on the review’s findings.
Base rate and entrepreneur relief
If a farmer sells up, the capital gain is taxed at 20%. Because many farms have been inherited without money changing hands, the land value is currently set at the base year of 1982, or the value at which it was acquired if later than 1982.
The rise in land values over the almost 40 years since that base year means sale values can extend to millions of pounds without attracting a large tax payment.
Mr Thorpe said that was especially so if there was a “hope value” attached, where the land value is raised because it is destined for development.
Farm owners could also claim entrepreneur’s relief and pay a lower rate of 10%, reducing the potential bill still further.
But the review has suggested the chancellor could scrap both the 1982 base year and entrepreneur’s relief.
Under this worst-case scenario a 10% tax on 1982 values could be replaced by a 45% tax based on current values, amounting to a huge difference.
No mention was made in the review of scrapping rollover relief, which allows businesses to sometimes delay CGT payments if they spend money arising from the sale of an asset on a new asset.
Gift holdover relief
CGT is not levied when a business hands over assets without any money changing hands, for example under a succession plan.
This is termed gift holdover relief and means no charge is payable by the recipient of the asset, for example when a son or daughter takes over the farm.
In contrast, if that relief were removed by the chancellor, the recipient could face a huge tax bill based on the value of the asset they have received.
“This is potentially a huge blow because the recipient may not have the reserves to pay the bill,” Mr Thorpe said.
The annual CGT allowance, called the “annual exempt amount”, could also be under threat.
The allowance means the first £12,300 of gain derived from a sale is free of tax. But the OTS has recommended the government should consider reducing the tax-free ceiling to between £2,000 and £4,000.
The OTS review is available as a PDF on the government’s website.