Darling delivers a nasty tax shock for farmers

Farming advisers have reacted with alarm to Chancellor Alistair Darling’s move to reform the capital gains tax system, announced in last week’s pre-budget report.

From next April, increases in the value of all assets will be taxed at a new rate of 18%, significantly higher than the effective rate of 10% that business asset taper relief provided.

But crucially, his decision to scrap indexation allowance means inflationary rises in the value of farmland – which have been protected from taxation – will now be liable for a hefty tax bill.

In some cases, this could even wipe out the gain in value altogether, said Jeremy Moody, secretary of the Central Association of Agricultural Valuers.

“There’s a lot more in it than first appeared. The public’s eye was caught by Mr Darling’s announcements on inheritance tax. But the changes to the capital gains tax system are quite a serious exercise in raising money from businesses,” said Mr Moody.

Indexation Allowance scrapped

Although an effective tax hike from 10% to 18% will be unwelcome enough, much more serious for farm businesses if the loss of indexation allowance.

Because farmland values were quite high in the reference year – 1982 – indexation provided for an inflationary “paper” increase in worth.

In practice, if farmland was worth about £1500/acre in 1982, indexation effectively doubled the base value. The indexation allowance shielded the entire inflationary gain until 1998, so tax was only chargeable on the “real” gain in value.

“The chancellor has now stripped all that away. Now the entire gain, both inflationary and in real terms, is all taxable from 6 April next year. It effectively eats into the capital value of farmland assets,” said Mr Moody.

“Those who deliberating about selling in the next few months are likely to bring sales forward. Where they cannot, the only relief that is still useful to them is rollover relief, which, with its time limits of three years, is likely to put upward pressure on prices – generating yet more capital gains tax.

“My concern is that the chancellor has only thought about the position of companies – not sole traders or partnerships.

Inheritance Tax

Despite the fanfare, the chancellor’s announcements on inheritance tax rules made little difference in real terms, Mr Moody added. “Ostensibly, he doubled the allowance for married couples. But in practice it’s just made it easier to do this and he hasn’t done anything for people who aren’t married.

“It allows married couples to transfer unused nil-rate bands between them so when the surviving spouse dies both reliefs can be used. It adds an element of flexibility but it’s not something that couldn’t have been done before.”

Charles Birch of Brown & Co urged landowners contemplating a sale to act decisively.

“While non-business assets such as cottages may well be taxed more lightly under the new rules, even where they have been held for a long time, the new regime would be a particular blow for land as indexation plays a very great part in reducing the taxable value on land sales.’

“Landowners, particularly those contemplating a sale or transfer to the next generation, have serious extra issues to consider and implement before spring 2008. Not only is it necessary to take advice about established trusts, but decisions need to be made whether to advance or delay transactions.”