This year the festive period has been commandeered by the politicians.  Not only do we have the usual tasks of pre-ordering the turkey and stocking up on the sherry, we also have to get to the polling booths tomorrow and cast our vote for the future.  After the election result on the 13 December, we will have the fallout to manage, along with a UK and Scottish budget to plan for in the New Year and finally our ‘exit’ from the EU on 31 January. There are certainly significant changes ahead for our tax system as we know it - so how can we plan in what is a time of flux, and what hints have we got from the Ghost of Christmas Yet To Come as to what these changes might be? 

By considering the party manifestos, we can begin to see the direction of travel.

In Scotland, as income tax has been devolved to the Scottish Parliament, regardless of what the manifestos say in terms of UK income tax rates, the Scottish rate of income tax continues to be the preserve of the Scottish government.  A report released recently by Holyrood’s finance committee shows that income tax rates raised in Scotland for 2017/18 are around £97m lower than what Scotland would have had under the previous system prior to devolution of these income raising powers.

This could well mean that the Scottish Finance Minister must further raise the Scottish rate of income tax, particularly if growth remains sluggish.

Taxes which Westminster continues to have control over, and where the party manifestos can shed light, include capital gains tax (CGT) and inheritance tax (IHT). 

The ex-head of HM Revenue & Customs announced recently that he believes that whichever party gets into power, they should do away with Entrepreneurs’ Relief. Entrepreneurs’ Relief is a CGT relief which allows a business to be sold at a 10% tax rate. If this relief were abolished, it would mean the tax charge on the sale of a farm business would be doubled overnight, on the assumption the existing 20% CGT rate remains unchanged. Of course, any new government could well increase CGT rates to be more in line with income tax rates; it was not that long ago that we had a top CGT rate of 40%. So, if you are considering a sale of your business, now may be an opportune time whilst these low tax rates exist, subject to other commercial factors being considered.

With regard to IHT, Labour have said they would scrap the Residence Nil Rate Band. This provides an additional nil rate band of up to £150,000 per individual (£300,000 for a married couple) which can be set against the value of your house if it passes to your children or grandchildren. Labour have also published a report discussing the idea of replacing IHT with a lifetime gift allowance. Instead of paying up to 40% on the value of the estate on death, Labour want to tax annually any gifts made to someone in excess of £125,000, at income tax rates. 

The Conservatives’ manifesto is silent on changes to IHT, however we do have the Office of Tax Simplification’s IHT review, released back in July. This body is independent of government and was asked by the previous Chancellor Phillip Hammond to review the tax.  The Office of Tax Simplification came up with several recommendations for government consideration. One which could have the most significant impact for rural businesses is the request that government consider revising the test that applies for business property relief to be available. Business property relief is a very valuable IHT relief and can see the value of a business reduced to nil when it comes to determining the value of the estate for IHT purposes. Any change to make this relief more difficult to obtain would have a significant impact on diversified rural businesses, and would likely require them to restructure to retain the relief.

As many rural businesses diversify, it is important that owners keep in mind the business property relief test, which is referred to in legislation as a ‘wholly or mainly’ test.  To date this has been interpreted as meaning that as long as more than 50% of the businesses’ activities are non-investment, then the relief is available.  The Office of Tax Simplification suggests this be aligned in future with the CGT test which applies for reliefs such as Entrepreneurs’ Relief and holdover relief.  The CGT test is more stringent, being an 80% trading test.  If the UK Government decided to implement this recommendation in the future, then it could see a number of rural businesses no longer qualifying for the relief and the business requiring to be restructured.

In summary, change is afoot. We recommend you review your business at this time, determine the tax reliefs currently available, and consider what the position would look like if the tax landscape changed.  From that basis, thought can then be given as to how best to protect assets for the future and an action plan put in place that works for your circumstances. Our specialist tax team are here to help, so don’t hesitate to get in touch.