Rural Business and Landed Estates Newsletter – June 2024

Introduction

We are in an election year, there are high interest rates, there is new land reform legislation in Scotland, the carbon markets are affecting land values and income, and the tax rules keep changing. These are just some of the key factors affecting rural businesses and landed estates. At Henderson Loggie, our team are happy to discuss any of the challenges facing your business and have set out below some thoughts on the tax position around some of these.

Furnished Holiday Lets

We are aware that for many estates and for the rural community in general, furnished holiday lets (FHL) are a key source of income. The people and income they bring to the rural areas in which the FHLs are situated is also vital for many in these communities.

Currently, FHLs qualify for certain tax advantages and these apply to income tax ,capital gains tax, the ability of offset mortgage interest and the income currently qualifies as earned income for those wishing to make pension contributions. When compared with the tax treatment for residential lets, the tax advantages for FHLs across these four areas have been very beneficial.

It was announced at the Spring Budget that the tax advantages for FHLs are to be abolished. While the measure was not included in this year’s Finance Bill, the expectation is the draft legislation is still on its way. If there is a change in government, this change may not occur, but if it does then, how will it affect you and is there any planning you should be considering?

The largest effect is on the CGT so would affect those looking to dispose of FHLs either to sell or to pass onto the next generation. Currently, most FHLs will qualify for business asset disposal relief for CGT taking the tax rate from potentially 24% down to 10%. On a property with a gain of £250,000, this is a tax difference of £35,000.

If you currently have FHLs with a mortgage on it, under the current FHL regime, you can offset the full mortgage interest by getting tax relief at your highest rate. If these revert to the rules for residential lets, the tax relief on the mortgage interest will be restricted to a tax reducer of 20%.

As profit from FHLs (but not residential lets) qualifies as earned income for pension contributions, those in receipt of FHL profits can make pension contributions. If this is your main source of income and it no longer qualifies as earned income, this would severely restrict the ability to save for retirement. In the case of many rural estates, FHL income can often be the main source of profit in some years.

So, what planning can you consider? If you are looking to sell or pass on properties in the near future, you may wish to bring this forward to ensure you qualify for the current reliefs.

If you are intending to keep the properties for the longer term, then you could consider putting them into a different structure such as a company or a trust.

As with most situations, there will be more factors than just tax in your decision and good all round advice is key before making any decisions.

Succession with Diversification and Natural Capital

With a general election approaching, inheritance tax (IHT) has unsurprisingly become a hot topic again for many political parties. Proposals range from complete abolition to closing perceived loopholes. Some parties even advocate for a complete overhaul of the system, though details remain unclear.

Currently, there are four main reliefs and allowances for IHT:

• Business Property Relief (BPR)

• Agricultural Property Relief (APR)

• The nil rate and residential nil rate bands

• Pensions being out with an estate for IHT

All of these reliefs, exemptions and allowances are under scrutiny and will affect many individuals in the UK but perhaps, no sector more so than the Rural sector and Landed Estates.

Many Landed Estates and rural businesses have significant capital value, but this can come with large maintenance costs and often a lack of free cash to meet IHT bills. Natural capital interest has seen increased capital values which can exacerbate this issue. These businesses often rely on diversified income streams, like shops, renewable energy (solar panels, wind turbines), or rental properties, to support their core operations. While some of these new income streams qualify for IHT reliefs, others do not and can taint existing reliefs.

The most common queries we get are around the availability of APR and BPR when natural capital comes into the equation and when businesses diversify into new sources of income such as woodland, the alternative energy market such as solar panels and wind turbines, retail business streams such as a shop or online shop, rental properties, and sporting operations.

It is important to look at these individually and as a whole. Some of these individually, if they are structured and operated in the right way can qualify for APR or BPR and in some cases both. Others are unlikely to qualify for either, but can be covered by BPR if when looked at in the round, if the whole estate qualifies.

Ultimately, seeking professional advice is key. Experts can help you determine:

• Which elements of your business qualify for reliefs.
• Whether adjustments can be made to improve your IHT position.
• If restructuring is necessary for a better tax outcome.

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