Farms can work quite well in trusts, especially where the succession is uncertain. The trust allows different family member to benefit for certain periods of time while keeping the integrity of the land.
The Budget 2024 proposals will have impacts on trusts, but these will be coming in gradually. The first ten year charge after 6 April 2026 will be in the new rules but that first charge will be reduced to the extent of the part of the ten year period being before 6 April 2026.
When an asset is attached to land, it becomes part of the land as a fixture and ownership will pass with the freeholder. This is all very relevant in the case of farms, where a structure like a grain silo is probably a fixture. In this article we are going to consider the situation where a farm has been incorporated with the land remaining outside the company, still belonging to the landowner. The company then incurs cost in adding an asset like a grain silo to the land.
It is quite common for there to be no written agreement between the landowner and the company concerning the company’s use of the land. It might cause some consternation to the company directors when they are told that they may not be able to include that new grain silo in the balance sheet. It can also give some tax headaches which we look at below.
The occupation of the land will usually be treated as a tenancy at will, which can come into effect by implication. This is not strictly a lease and has little or no protection or tenure for the company. It is often seen as a stepping stone to a more formal agreement.
Here is the article in Croner which discusses this further
If you ask most farmers in the UK what last year was like I think they would probably all use the word ‘wet’. Not just in terms of the amount of annual rainfall, but the patterns are showing more concentration. This was evidenced for 2023 in the State of the Climate report as follows: ‘March, July, October and December 2023 were all top ten wettest months in the UK monthly rainfall series from 1836; the first year this has happened for four separate months’.
This has created more pressure to stop flooding and various initiatives to control water flows. The Environment Agency published research on 12 February 2025 in which the section on rivers and flood plains contained examples of using rivers in the landscape to create control over water flow and to store water while at the same time creating good habitat.
For farmers and landowners this comes at a cost, and there are various ways that this can be funded. Some examples of the ways the land works can be funded are listed below.
Here is my article on Croner which discusses some aspects of this.
Many people listened in stunned silence as the chancellor announced that Agricultural Property Relief (APR) was going to be restricted for farms with effect from 6 April 2026.
In summary, every individual and most trusts existing on Budget Day will be given a £1m band to be shared between APR and Business Property Relief (BPR) for relief at 100%. Transfers qualifying for APR or BPR over £1m will qualify for 50% relief. Assets, such as land let on tenancies created before September 1995 which currently qualify for 50% relief will continue to enjoy the 50% relief, and this will not use up any part of that 100% band. An anti-forestalling rule acts to catch gifts made from Budget Day until the changes come into effect in 2026.
I have completed my latest quarterly update on Practical Farming: Poole published electronically by Croner. The main focus of this update is a new chapter on selling ecosystem services and some commentary on the Agriculture and Rural Communities (Scotland) Bill (ARCS) published in September.
In the tax profession we need to quickly come up to speed on ecosystem services. For this reason, I have included some definitions as this can be a confusing area for the accountant or lawyer when talking to the environmental advisers. The subtlety of meaning is important so I have tried to disentangle how the language and how the business structures work. I have been working closely with some of the country’s leading environment lawyers on trying to understand the language, and I hope I have captured their essences. I will be updating this chapter regularly as things change, and especially when the government make announcements following their consultation on the taxation of ecosystem services.
I have also been working closely with a national firm of environmental consultants and satellite data providers in designing a Biodiversity Net Gain product over the last couple of years, and this has led to all sort of interesting opportunities to consider how ecosystem services can fit into land management. More on this later when this becomes public, but I mention it how as I feel it has given me sufficient confidence to enable me to write the chapter on selling ecosystem services and especially the section on Biodiversity Net Gain.
The government commentaries published alongside ARCS demonstrated a strong commitment to Crofting so I have brought Crofting into the book. I find this approach to land use interesting, and I hope it might have an important part in the future of land use in the whole of UK, not just in Scotland. This did mean I had to add some commentary on other Scottish leases and flesh out Scottish land law a bit. I am not an expert in Scottish land law, and the differences between English and Scottish law are subtle. I hope I have struck the right balance.
The Bill also introduces new thinking on farm payments in Scotland with a new framework for how these will work from 2026, when the current holding legislation in Scotland expires.
I have, today, signed a contract for a book ‘Poole on Farming’. To me this is the most interesting and important trade of all, and the nexus between community, wildlife, landscape and food make this critical now as we face disruptive changes to our society from many directions.
The economics of farming and landed estates is changing with the evolution of farm payments, new opportunities for utilising and offsetting Natural Capital and Carbon along with new Biodiversity Net Gain rules in the Environment Act 2021. All of these will be surveyed in detail with thoughts about how these can be applied on landscape level by landowners and farmers working together.
By its nature, farming has a strong community rooted in the soil. It is one of the few trades where people work together across businesses, whether by partnership, contract farming arrangements, shared assets or infrastructure through formal cooperative structures like those provided by the Cooperative and Community Benefit Society Act 2014. I will be giving detailed instruction about all these together with pro-forma documents.
And of course all the special tax and accounting rules which I am sure you expect from me – averaging, herd basis, losses, capital allowances, VAT, and how capital gains tax, inheritance taxes work in the most common transactions with detailed guidance.
There will be thoughts on incorporation with all the advantages and disadvantages that a company can bring. Yes to R & D and land remediation relief, but what about ATED and benefits in kind. And that burning question: should the land go in?
And finally looking at various ways to diversify the use of the land and what impact this has on the business structure.
Get ready for publication in early to mid 2023.
And yes, I did pick up Oliver Rackham’s seminal work for 50p!
On 30 November the Treasury responded to the Office for Tax Simplification about ongoing consultations, and has made two significant announcements.
Firstly that there are not going to be any changes to Inheritance Tax (IHT). This means, at least, that we can start planning again with some certainty.
Secondly, as regards capital gains tax (CGT), the government are going to move forward on some administrative changes to capital gains tax, but it looks like substantive changes are shelved for the short to medium term.
The following are going ahead:
Integration of reporting and paying CGT
Extending reporting deadline for sales of property to 60 days
Extending no gain / no loss window on marital separation
Extend roll over relief on compulsory purchase
Improve guidance
The following are going to continue to be considered:
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.
The coronavirus pandemic has meant spending more time at home than I had originally planned for. Partly for this reason, one moment I was anticipating came while I was at home, staying safe and getting ready for a quiet new year. This video is from an estate of which I am a trustee, and which I take part in managing.
Until New Year’s Eve we had not seen Otters in the waterways, so this was the first appearance. We think she is a grown female pregnant with kits, so we are very thrilled to we may have a new family of otters. This one has just succeeded in catching a rather large and tasty looking fish.
This is going to be the year when work starts in earnest to bring the lake and rivers up to a good standard, making use of the new ecosystem service payments scheme within Tier 2, or even a Tier 3, under the new Environmental Land Management Scheme.
Otters are protected so we will, of course, be ensuring that all plans fall within all published guidance. It is my view that we protect wildlife best by allowing people to see and understand it. By doing this we build respect and love for the wonderful creatures living with us on this earth so it will be natural that we should find ways to live in harmony together with them.
A lot of value is gained from creating connected spaces for wild animals which means working with landowners for connected spaces. This is where the Tier 2 and Tier 3 schemes can help bring people together with a financial incentive.
I have had some interesting experience over the last year getting involved in a couple of rewilding projects, and especially thinking about how the tax and economics work. It is quite interesting that rewilding under the new schemes with the existing tax rules can give some surprising advantages to the landowner. Not least of these is that the payments for ecosystem services where there is a plan to carry out some actions for wildlife, and especially where those payments are based on results, can be treated as trading payments. Under current this this changes the nature of the land into being an asset that can qualify for business relief for inheritance tax purposes.
As the year progresses I will of course be sharing with you, from time to time, any interesting insights we gain in putting this scheme into place.
Rishi Sunak is planning to give a Budget on 3 March 2021, and it is expected that there will be changes to various taxes including capital taxes included in that. There is some published information to base thoughts on possible changes and it is worth giving this some consideration.
Inheritance Tax
There are two main sources of information to consider here as follows:
All-Party Parliamentary Group on Inheritance and Intergenerational Fairness (APPG) which published its report “Reform of inheritance tax” in January 2020
The Office of Tax Simplification which published the document “Capital Gains Tax Review: Simplifying by design”
The APPG has been considering in the round what is fair for capital taxation. Its main proposal seems to be to reduce the amount of intergenerational transfer of assets where there is no tax charge. Their suggestion to achieve this is to have an annual exemption for gifts of around about £30,000 and for there to be an immediate tax charge of around 10% on the value of gifts above that.
What is now the nil rate band of £325,000 would be called the ‘death allowance’ and this would only apply on death. The group considered a rate of 40% to be excessive but instead would be looking at a rate of between 10% and 20% on the basis that this would be a low enough rate for the tax to be broadly based without the need for complex reliefs. This would go along with an abolition of agricultural and business reliefs on the grounds that a 10% rate spread over 10 years, i.e. 1% per year could be paid annually out of net income and would be seen to be fair. In any event any relief for trading is likely to be pinned to an 80% test rather than a 50% test as is now the case for inheritance tax.
This leaves open the question as to how trusts would fall into this as there was no death, and the answer would probably be an annual charge which like the 10 year charge we have now would seek to equate the inheritance tax in the trust to that of a human life.
The main residence nil rate band is seen as an unnecessary complication and I would expect this to be abolished in the budget.
Capital Gains Tax
As far as capital gains tax is concerned the suggestion in the APPG report which has resonances in the Simplifying by design report is to take away the probate value uplift on death. The APPG goes further here in that they do link this to IHT relief is that so this would apply in all cases, whereas in Simplified by design the office of tax simplification consider only taking the probate value uplift away where an asset has been exempted from inheritance tax either by way of agricultural or business relief.
There is broad agreement within the profession that the rate of capital gains tax is likely to be increased from the current rates of 10% and 20% in (18% and 28% for residential property) to the rate of income tax which are 20% 40% and 45%. It has always been my view that such rates would be unfair as capital gains include an element of inflation. The Simplifying by design report meets this question by introducing the concept of an inflationary relief, which would take us full circle back to where capital gains taxes were until 2008. The thinking behind having capital gains tax rates around half of income tax rates is to give a broad brush relief for indexation while keeping the walls simple, and this is the reason that many jurisdictions have a lower rate for capital gains tax as compare to income tax.
If a sale of the assets was imminent, I would advise the tax payers to consider entering into some planning, for example a contract for sale that is left uncompleted. However, if a sale is unlikely I would advise against such action as this may just cause more complications.
Income Taxes
Dividends are taxed at the rate of 7.5% in the basic rate rising to 32.5% for higher rate and 38.1% for additional rate taxpayers. This is markedly lower than the rates of income tax on other sources of income (20%, 40% and 45%) as it is intended to reflect the payment of corporation tax in the company. Whilst this may seem fair for listed companies that pay dividends out at arm’s-length, it seems less fair in the context of comparing dividend payments with payments of remuneration which are subject to national insurance contributions.
Two potential changes have been identified, either or both of which Rishi Sunak may wish to pursue – either national insurance might be added to dividends paid from close companies, or the rate of income tax on dividends might be increased to the full rate of income tax.
If the rate of income tax is increased then the deduction in the company for remuneration would be seen to compensate for the lack of national insurance payment on the dividend, so it would seem unfair to introduce both.
I think the likelihood of either of these changes is quite high and therefore I would strongly recommend that if dividends are being contemplated before sixth of April such payments should be made before budget date.
