Farmers and rural businesses could face some significant changes to their tax bills in the coming years, following one of the most dramatic Budgets in recent history.
In the first Conservative Budget for nearly 20 years, Chancellor George Osborne announced a move towards a low tax economy with a reduced welfare bill, making people more reliant on earning an income. But while there were some welcome headlines – like the move to five-year farmer’s averaging to smooth out volatile incomes – the devil was in the detail, and included some very thorny changes.
“Small businesses are really likely to feel the pain following this Budget,” said Dan Knight, senior manager at Old Mill accountants. “They already have the impending burden of paying a percentage of employees’ pensions through the auto-enrolment process, now they also have to meet an increasing wage bill through the ‘living wage ‘ regulations.”
Although the reduction in Corporation Tax would be welcome to big businesses, changes to taxation of dividends from April 2016 meant many small business owners would have an increased personal tax bill, said Mr Knight. “Dividends up to £5,000 a year will be tax-free – anything over that will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. So an owner manager taking a basic annual salary of £7,500 and dividends of £27,500 will incur an additional £1,700 tax liability next year.”
Those looking to invest in their business would be relieved that the Annual Investment Allowance would only be cut to £200,000 compared to a possible base of £25,000 – although it was still a sharp fall from the current £5000,000, said Mr Knight. “However, with immediate effect the amortisation of goodwill will not be an allowable deduction for Corporation Tax. So on the acquisition of a contracting business, for example, where an element of goodwill is purchased, the cost will no longer be deductible against trading profits.”
There were also major changes to pension and Inheritance Tax rules, which could have a major impact on farmers, he added. “The Lifetime Allowance for pension contributions will reduce from £1.25m to £1m from April 2016, although ISAs are to become more flexible, allowing individuals to withdraw and replace cash in-year, which will be helpful during periods of restricted cash flow.”
The Inheritance Tax nil-rate band would be frozen at £325,000 until April 2021 – a major concern for farmers and property owners whose asset values continued to rise rapidly, said Mr Knight. “There are proposals to bring in a main residence nil-rate band of £100,000 from April 2017, rising each year to £175,000 by April 2020.”
However, where the net value of an estate was more than £2m, the main residence nil-rate band would be withdrawn at a rate of £1 for every £2 over the threshold. “It will be interesting to see how the new rules apply to farmhouses, where Agricultural Property Relief is restricted under the principles established by the Antrobus case,” he added. “As is always the case with Budgets, it will take time to identify the full implications of the changes, but it’s vital that farmers and landowners take steps to minimise potential tax bills both now and in the future.”
- For more information contact Dan Knight on 01305 755659.