How will the budget announcements affect farmers?

Farmers need to do some serious planning to take advantage of new Annual Investment Allowances and tax arrangements on dividends unveiled in the Summer Budget yesterday.

 

In this article I set out a review of the main changes affecting the agriculture sector.

 

Business Tax

As expected, Annual Investment Allowance will fall from the current figure of £500,000 p.a. to a new permanent limit of £200,000 p.a., so where major capital expenditure is planned, farmers should ideally accelerate it to before 31st December and take advice on the transitional rules, since timing is important.

 

Farmers Averaging was not mentioned in the Budget speech but a 26 page consultation on how five year averaging might work was issued later the same day. Two potential methods were illustrated, both of which will give rise to complex calculations.

 

Personal Tax

A major reform of the way that tax is paid on company dividends was announced by the Chancellor. Previously these had not given rise to a tax charge for basic rate taxpayers. From April 2016, there will be a £5,000 individual exemption and dividends will then be charged at 7.5%, 32.5% or 38.1% depending on the income of the recipient. Farmers need to review profit extraction policies for family companies and consider splitting shareholdings to maximise the value of the individual exemption.

 

Inheritance Tax

As expected, an additional allowance of £100,000 will be introduced from April 2017 where a residence is passed on death (but only where it passes to a direct descendant). The relief will rise to £175,000 by 2020/21 and thereafter will be index linked. It will taper away where the net estate is over £2,000,000, but helpfully it will still be available when an individual downsizes their home and assets of the equivalent value are passed on to descendants.

 

The proposals look quite complex but they may at least reduce the interest which HMRC have recently shown in farmhouses.

 

Farmers need to review wills and inheritance tax plans to ensure the relief is not wasted (e.g. by leaving the house to an indirect descendant).