How changing land use could affect your tax position

Robin Dandie

Robin Dandie

Business Advisory Partner

This article first appeared in the Spring 2022 edition of Scottish Land & Estates LandBusiness magazine.

The spotlight has been firmly on climate change for some time now, and with this focus only growing in intensity, all businesses must consider the impact on their operations, both now and in the future. In the rural sector, the need to combat climate change has given rise to the potential for land owners and managers to receive income from new sources such as payments for carbon capture. This in turn has driven an increase in land values and in addition, existing agricultural subsidies may well be replaced with payments to encourage land use to benefit the environment.

This is all potentially good news for land owners but there could be some concerns from a tax perspective. Many of the tax reliefs that are applicable to land are available when the land is either used for a trading purpose or is in agricultural use. These reliefs include Agricultural Property Relief (APR) and Business Property Relief (BPR) which are inheritance tax reliefs, and gift holdover relief, rollover relief and business asset disposal relief, which are all used to mitigate capital gains tax. Farm averaging of profits for income tax purposes could also be affected where income from other sources is included as income of the same business. It may be necessary to create separate businesses to retain the ability to average profits.

In recent years many mixed use farms and estates have been able to take advantage of tax reliefs due to the fact that a majority of the activity carried out is classed as trading for tax purposes rather than investment activity. A simple example would be where there is farming and rental income in the same business, then BPR may still be available when the tests of activity are applied and the farming or trading element exceeds the rental portion. There are different tests applied depending on the relief and tax that is at stake.

If there are to be new income sources introduced which are considered to be non-trading then this may put at risk the ability to make these claims and, even without receiving income, it is possible that the value of the land may already have increased based on non-trading returns. For example, if a block of land had a value that was enhanced due to the possibility of it being used to offset carbon emissions then that increased value may affect the tax position of the asset.

The questions that will need to be addressed include:

  • whether the sale of carbon credits is deemed to be a trading or investment activity
  • whether rewilding of land is agricultural or business use of that land if there is no grazing or cultivation being undertaken  

Going forward, professional bodies will be liaising with HMRC to clarify the tax treatments for various scenarios.

Each case will be different and much will depend on the scale of the new activity and how that then impacts on the existing or previous trading position of the business. In some cases there may be benefits in carrying out re-organisation or succession plans before changing the overall nature of the business and taking advantage of reliefs that could be lost in future.

Before making any decisions, it is vital to consult with professional advisers to ensure that you have considered all aspects and taken the potential consequences of any changes into account. Our Rural specialists can work with you to ensure you make the right decision for your circumstances, so please get in touch with me or another member of our team if you would like to discuss these issues further.

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