While we were expecting changes to capital gains tax and there had been rumours of changes to agricultural and business property relief (reliefs for inheritance tax), most of us were not expecting there to be such significant changes.
As we start to review the details of these changes, combined with the increase in employers’ national insurance and the living and minimum wage increases, it is clear that rural business and owner managed businesses will be the most severely impacted.
The increases in the national living wage and minimum wage have been welcomed by many and will help many of the lowest paid employees in the rural sector in the short term. But for the employers, these increases combined with the increase in employers’ national insurance from April 2025 will considerably increase the costs to the business. In some sectors, this increased cost can be passed on to the consumer but in the rural sector with margins already so small and with so much pressure to keep food prices down, it will likely lead to stagnant wages for those not on minimum wage or reduction in employee numbers.
Agricultural property relief and business property relief have long been vital in allowing family businesses and farms or estates to be passed down the generations as a viable ongoing business. It provides stability to the business and its workforce knowing that the death of one of the owners, will not result in part of all of the business being sold which would likely lead to job losses and in many cases a complete cessation of the business.
These reliefs will be restricted from April 2026 meaning that only the first £1m qualifies for 100% relief. This may seem like a lot to some but the average farm in the UK is valued at £2m. With the value above the £1m cap given relief at 50% and then taxed at 40%, this gives an effective rate of tax of 20% on the value of the farm. On an average farm of £2m, an IHT charge would arise of £200,000.
The restrictions to these reliefs will have long term impacts and the reduced stability of the business in the long term could also lead to problems in bank lending and future growth of the business. A reduced ability to borrow would make it very difficult for many farms to find the money to pay the tax.
When planning for inheritance tax and passing assets down the generations, capital gains tax is usually chargeable on any transactions. This was raised yesterday taking immediate effect by 8% on the lower rate (going from 10 to 18%) and by 4% on the higher rate (going from 20 to 24%) which bring all capital gains tax rates in line (there was previously different rates for residential property).
So, the questions are what should you be doing now? We would recommend the first items on the agenda are reviewing your costs and forecasting including remuneration planning and reviewing your succession planning.