Fog starting to clear

A personal perspective by Stephen Poole

This is a photograph I took in Madeira a few years ago watching the sun rise having spent the night strapped to the mountain carefully watching Zino’s Petrels roost. This was a life changing moment for me, but I think we are at such a moment now as regards management of land in the UK.

The following comments relate to England only. Scotland, Wales and Northern Ireland have their own systems. I have also left out considerations relating to Brexit.

For those involved in farming and land management, things are starting to resolve, but we are not fully home yet. I like to think of land management as being a combination of three different disciplines, all of which no one person can be expert at. This means that to succeed in this there must be a team effort between different disciplines. To me the areas are as follows:

  • Looking after land for wildlife and human recreation
  • The economics of ownership of the land, with the necessity to raise enough income to be able to make a living and look after it
  • The impact of various different taxes on the landowner and activities carried on their land

I put myself as expert in the last category, and I dabble in the second category. I fall woefully short however in the first category, and therefore it is always a pleasure to work with knowledgeable ecologists, wildlife experts and historians. So many pleasant hours have been spent talking into the night about the potential chaos that beavers can wreak compared to the proven benefits . . .

I think as a country we are starting to get a better grip on the way to manage land for wildlife and for the environment more generally, and it looks like good progress is being made on Gove’s popular 25 year plan.

The economics of land management

On the economic side, the erosion of the basic payment as set out in the agricultural transition plan last November is a concern. It was very interesting therefore to see the Sustainable Farming Incentive in England stepping in for what was tier 1 under the original ELMS scheme, and what pleased me about this was that specific rates per hectare were given for specific activities. The farmer will not have to start with a plan, but will develop a plan along with DEFRA. I thought this was a very good approach and accordingly I telephoned all my farming clients to tell them to get within the scheme by the deadline of the 11th of April just gone. To me this looked almost like free money for the farmer.

Tier two of ELMS has been renamed to the Local Nature Recovery, and Tier three has been renamed to Landscape Recovery. Everyone advising farmers whether you be accountant, lawyer or land agent should have a good knowledge of the agricultural transition plan published in November 2020.

In addition to all this we have the potential advantage of Biodiversity Net Gain offset payments under section 106 of the Town and Country Planning Act, but soon to be under the Environment Act once it passes through Parliament, probably later this year. I am starting to see deals valued at around about £12,000 per unit of biodiversity, but the sticking point is going to be the need to enter into a 30 year agreement to maintain such biodiversity once the payment is received.

There are many other schemes and sources of money for landowners to tap into including the woodland carbon code and local water authorities. I think the best place to start here is with the local wildlife trusts and local river trusts who will know what the local priorities and incentives are.

Taxation – a few thoughts

The taxation of land has been under some doubt in the last few years, as the taxation of trusts has been under review for a long time, and there has been of uncertainty on corporation tax rates. The government announced in its ‘Command Paper’ of 23 March 2021 that ‘the responses did not indicate a desire for a comprehensive reform of trust tax at this stage. The government will keep the issues raised under review’. Typically mealymouthed but I think this is telling us that trust taxation is not going to change significantly any time soon. Therefore the choices as between personal ownership, trust ownership or sometimes corporate ownership are looking fairly settled.

To me the increase in corporation tax to 25% announced in the budget slightly changes the calculus here. Corporate ownership has been sought for a number of reasons, such as:

  • To enable profits to roll up at that low rate of corporation tax and allowing dividends to be fed out of the company at a lower rate of tax than normal income.
  • To allow research and development tax reliefs to be claimed
  • To access the extra deduction for land remediation relief.
  • The new capital allowances super deduction is looking quite interesting.

The hated Annual Tax on Enveloped Dwellings (ATED) and income tax benefit in kind rules cause problems with having land and buildings in companies, especially residential property with the farmhouse itself always causing questions. I feel that the increase in the corporation tax rate will slightly blunt the edge of the incorporation advantage.

I have always been disinclined to put the actual land and buildings in the company, as once these assets are in it is quite hard to get them back out again without creating tax charges. The goodwill of farming is held to be attached to the land itself which means that if the land is kept outside the company the goodwill is probably also outside the company which means that companies can come and go without too many problems if the land is kept outside. However, one of my nagging doubts has always been that if the goodwill is outside the company what is the company doing for tax purposes? To me therefore neither approach feels quite satisfying.

Another interesting little problem I’m starting to discuss with people is the question of business property relief for inheritance tax on the land. Payments under ELMS for looking after the land might be treated as business payments if they’re going to be received on the results basis. If the management of the land is in a company and the land is outside, the amount of such business property relief on the land value is likely to be decreased.

Trusts to me are a very good way of owning land as they allow the land’s integrity to maintained across generations. Income in a trust is subject to income tax rates, and assets can be transferred between individuals and trusts relatively easily especially where agricultural relief or business relief from IHT is available. I always suggest that trusts themselves just collect tax on behalf of the beneficiaries . Ultimately where trust distribute their income there is usually just one overall incidence of income tax at the rate of the beneficiaries. However if the trust does not distribute all of its income there is a net tax loss in the trust, but many existing trusts will be past their accumulation periods which was 21 years until this was changed in 2009 to become more flexible.

I consider ‘normal’ trusts to be fairly neutral from an IHT point of view, with a 10 year charge at 6% being close to the death rate for a person surviving to the biblically allotted threescore and 10 years – ie 6% * 7 is close to 40%. It will be interesting to see whether any changes are made to this in the future.

Capital gains tax is being reviewed and the interaction between inheritance tax and capital gains tax starting to make more sense. The granting of a tax-free probate value uplift the capital gains tax has been an anomaly for a long time and I think it’s fair for this to go. I looked at this in my article Here we go round the roundabout. We seem to be settling on 40% as being the amount that feels fair for the country to take, in terms of a higher rate of income tax, and inheritance tax or capital gains tax. The capital gains tax rates are always going to be slightly reduced for inflation either by a blanket lower rate such as we have now, or through some sort of indexation allowance.

We are still waiting to see exactly how local nature recovery and landscape recovery schemes will work, and we still don’t know exactly how net gain offset payments will work in practice. Therefore my feeling is that the fog is starting to clear, but the sun has not yet arrived.

I am going to be speaking about these matters for the Chartered Institute of Taxation in June, and am considering the acceptance of a speaker invitation at a university next year. I am therefore going to be keeping on top of this area over the next year or two so watch this space for updates.


A green future: Our 25 year plan to Improve the Environment: 2018

Agricultural transition plan: November 2020

Sustainable Farm Incentive: March 2021

Tax policies and consultations: Spring 2021

OTS Capital Gains Tax Review: Simplifying by design