Will Farmers be the losers from today's budget?

The fallout from George Osborne's budget today seems to me mostly favourable. Headline  cuts to Corporation Tax and the raising of the Personal Allowance to £10,000 next year have won plaudits, not too mention the CUT in beer duty!

But also announced by the chancellor was a raft of anti avoidance measures. Two items that haven't received many headlines may have a significant impact upon the affairs of farmers.

IHT Changes

The first is the introduction of legislation to prevent the claiming of IHT relief on some loans. Whilst this appears a sensible approach on closer reading of the proposed rules http://www.hmrc.gov.uk/budget2013/tiin-2006.pdf shows that these rules will also impact on those with loans to buy assets that qualify for IHT reliefs such as Agricultural Property Relief (APR) and Business Property Relief.

It seems that HMRC are looking to set any loans against the asset for which they were taken. This differs from the current legislation that sets loans against the assets that they are secured against.

In recent years this has led to many farmers with debt to secure their loans on property that doesn't qualify for IHT reliefs. So whilst a farmer might borrow money to buy land they would secure the loan against a let house or valuable farmhouse to reduce the value of any chargeable assets on death.

The proposed legislation, drafts will be released next Thursday, suggests that this treatment will no longer be appropriate exposing many assets to IHT. No doubt HMRC will be looking at the purpose for which loans are taken out rather than what they are secured on.

Partnership profit shares

The other issue raised today was the announcement of consultation into the sharing of profits in partnerships.

In recent years partnerships, in which you can share profits as partners agree, have proved very flexible for families minimising their tax burden. Whether this has been by allocating profits to a corporate partner or an elderly partner to avoid National Insurance, significant tax savings have been achieved.

This has been even more evident with Tax Credits as young families have restricted profits to claim tax credits and elderly/company partners have shared profits and paid reduced rates of tax.

This is particularly prevalent in family businesses owned by several generations, which farming businesses almost always are. 

We will await the consultation document with interest as it might provide one of the biggest changes to the taxation of farm businesses for many years. Coupled with the IHT changes announced I can't help feeling that this wasn't the best budget for farmers. 

Update - Loans to Participators

The anti avoidance introduced for loans to participators might also have a big impact on corporate partners, not just in the farming world. 

As a firm we have always taken a cautious view of corporate partners but some people have introduced them to partnerships, and allocated them all the profits. Over time the company capital account in the partnership increases with the individuals capital accounts reducing and sooner or later becoming overdrawn.

New legislation will treat these overdrawn capital accounts as an overdrawn directors loan, giving rise to a 25% S455 tax charge. This should be repayable but already there is speculation that this repayment might end giving rise to a permanent tax charge. 

You can find out more about today's budget on Dodd & Co's website or email me or contact me on twitter if you have any questions.