MHA | Spring Budget 2023 - The agricultural angle

Spring Budget 2023 - The agricultural angle

Joe Spencer · March 27th 2023 · read

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Jeremy Hunt’s first budget has been described as “a Budget you will remember in ten years’ time”. From the agricultural perspective that is possibly wishful thinking, but nonetheless, there is more to it than meets the eye.  

Firstly, hidden within the post-Budget small print were two particularly relevant announcements. It was confirmed that the tax treatment of the farmers’ lump sum exit payment would be subject to Capital Gains Tax rather than Income Tax, and detailed legislation will follow in the Finance Bill. This had been preannounced in 2022, but it was good to see confirmation (though questions remain about exactly how it will work for partnerships and companies).  

It was also announced that there would be a “call for evidence” and consultation “to explore both the taxation of ecosystem service markets and the potential expansion of agricultural property relief from inheritance tax to cover certain types of environmental land management." This matter has assumed a greater prominence in recent years, the underlying legislation, having remained unchanged for decades, so the possibility of resolving the treatment, which can potentially relate to millions of pounds of tax liabilities, must be welcome.  

Changes to the capital allowance regime, giving companies a 3-year window of “full expensing” on plant and machinery and a 50% first year allowance on special rate machinery will also be welcome for businesses whose capital expenditure exceeds the £1m annual investment allowance. Since the vast majority of businesses do not have expenditure on this scale and/or are partnerships or sole traders, it is of limited general relevance. However, where a capital extensive diversification is planned, it might persuade the business to create a corporate entity for that purpose rather than including it within an existing partnership business.

Read more: The big question is whether capital expenditure relief can be accessed by farmers

The big headline grabber was, of course, the review of pensions, with the abolition of the existing fund cap, and the extension of the annual allowance from £40,000 to £60,000. Whilst it may not do much to encourage retiring farmers to stay working, it will be particularly relevant in two circumstances: 

  1. firstly, for those with year ends other than 31st March/5th April we are now moving into the “transitional” arrangements for tax in 2023/4. Coming at a period of volatile profitability, many arable farmers, in particular may find that there is a significant increase in taxable profits for the current year. There is already a “spreading “mechanism to push some of the super profit into future years, and it may also be possible to change the accounting period for 2022/23 and utilise the existing two- and five-year averaging rules, but the possibility of a £60,000 pension contribution for each partner in a partnership adds a third and quite simple possible course of action.
  2. secondly, in the longer term, the concept of an unlimited pension pot brings back the concept of holding land within a Self-Invested Pension Plan (SIPP). Where a land purchase is in contemplation a few years in the future (when the neighbour retires, for example) it may be possible to use the new contribution limits to build up a tax-exempt fund using tax received contributions, so that it is in a position to make a future purchase as a cash buyer. The new land will then, of course, sit in a fund where it is not subject to Income Tax, Capital Gains Tax or Inheritance Tax. It should however be noted that commentators are already querying the justification of the Inheritance Tax reliefs in these circumstances, and there is Income Tax where the fund actually starts paying out a pension to the contributors. The proposed legislation specifically limits the future tax-free lump sum which can be drawn from a new uncapped pension to 25% of the existing cap.

Finally, it should also be noted that the Labour party are promising to reinstate the cap in the event that they return to power at the next election. It is unclear whether such a move would be retrospective, and it will not sit comfortably with the stated policy of helping doctors remain working within the NHS.

So, overall an interesting Budget containing more than meets the eye for the farming community – and plenty of detailed possibilities for the transitional year

For more insights like this...Visit the MHA Spring Budget 2023 hub  

You’ll find resources and practical guidance on any new tax measures and spending policies announced, to help you understand and manage the impact on you and your business.

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