USA Spring Budget 2024: what does the Budget mean for landowners and rural businesses?
HMRC responds to environmental land management consultation
March 2023 saw the Government release a consultation and call for evidence on the taxation of land management and ecosystem service markets. Evelyn Partners was one of 98 respondents to the consultation which closed in June 2023 and the Spring Budget 2024 has seen the Government’s responses published.
The consultation focused on three key areas:
- The taxation of ecosystem service markets (woodland carbon, peatland carbon, biodiversity net gain);
- The availability of agricultural property relief for changing land use (from farming to environmental); and
- The potential restriction to agricultural property relief for farm business tenancies of at least eight years in term
Extension in scope of agricultural property relief
The Government has announced the extension of agricultural property relief from 6 April 2025 to land managed under an environmental agreement with, or on behalf of, specific bodies (the UK government, Devolved Administrations, public bodies, local authorities or approved responsible bodies). It will only apply to land that was agricultural land and used by the landowner for agricultural purposes for at least two years prior to the change in land use.
This will be a pleasing announcement for landowners where uncertainty has plagued decision-making surrounding entering into potentially lucrative environmental schemes for fear of losing valuable inheritance tax reliefs. Clear records should be kept at the time of the change in use evidencing that the land was eligible for APR.
Tenanted farming
We envisage a positive shift in the tenanted sector where tenants may now (subject to the terms of their leases) consider taking land out of agricultural production to benefit from environmental schemes, with no inheritance tax impact on the landowner. Careful review of the tenancy agreements will be required prior to tenants undertaking any environmental schemes so all parties are aware of the implications and who is entitled to the income.
The focus on the tenanted sector was highlighted in the third key area of the consultation. The Government has announced agricultural property relief will not be restricted to farm business tenancies exceeding eight years in term. Some key points raised by respondents during the consultation process focused on the barrier to the market for new entrants where landowners may have had a lower appetite to grant leases to new tenants for a long term where there is no prior relationship or history.
Ecosystem service markets
The Government has said it will not make any changes to business property relief to deem environmental land management a qualifying activity. While it has already been announced that land registered to the Woodland Carbon and Peatland Codes will qualify for business property relief in its own right; where landowners carry out a mix of activities the general rules will need to be applied.
Helpfully, today’s response from the Government has said that where a business generates units (carbon credits/biodiversity net gain credits etc) alongside other activities (for example farming, let property rental), the generation of units and the land employed for this purpose will generally be considered a non-investment activity. Further work is required by landowners and their advisers to see whether the ‘non-investment activity’ would be considered a trading activity.
With no substantial changes to the UK’s inheritance tax regime for rural business owners, this announcement should help with strategic decisions and wider family and financial planning.
Other announcements that impact rural business owners
Abolition of furnished holiday lettings regime
Many mixed rural estates have diversified income streams from agricultural and non-agricultural activities, the latter often involving let residential property. In the Budget, the Chancellor announced that the furnished holiday letting scheme would be abolished from 6 April 2025 with measures in place to stop any tax advantages between Budget day 2024 and April 2025.
While the furnished holiday lettings regime has various tax benefits and so its abolition will impact some landowners, where these properties incur a loss in a year, perhaps due to large repair costs, historically the losses are ringfenced and can largely only be offset against other furnished holiday letting income. The abolition of the regime may mean such losses can be utilised against other non-furnished holiday letting property income such that some rural businesses may benefit.
Residential property disposals
Over the last few years some landowners have looked to diversify their asset base and dispose of low income-producing or repair cost heavy let properties; especially in light of Energy Performance Certificate (EPC) changes coming in from 2025. From 6 April 2024 the higher rate of capital gains tax for residential property gains will reduce from 28% to 24%. With many landowners now reporting UK residential property disposals, and paying the requisite capital gains tax, within 60 days of completion, this reduction will be a welcome cashflow booster to some landowners.
Stamp duty land tax changes
From 1 June 2024 multiple dwellings relief will be abolished. This is a relief from stamp duty land tax where a purchaser acquires two or more dwellings in a single transaction, or linked transactions. While there are no changes to the ‘mixed use rules’ that apply where a purchaser acquires land and property where there is a residential and non-residential element, the abolition of this relief may impact the agricultural sector where landowners look to acquire further residential property on nearby land.
Detailed analysis
IHT and rural
The scope of agricultural property relief is to be extended from 6 April 2025 to land managed under an environmental agreement.
Summary
Following the Government’s consultation in spring 2023 on the taxation of environmental land management and ecosystem service markets, from 6 April 2025 agricultural property relief will be extended to land managed under an environmental agreement with specific approved bodies. The Government has also decided not to restrict agricultural property relief to tenancies of at least eight years following a recommendation from Baroness Rock in the May 2023 Rock review.
The Government announced a joint HM Treasury and HMRC working group with industry representatives to provide clarity on the taxation of ecosystem service markets where existing law or guidance is unclear.
Separately, the Government has confirmed that, as announced in Spring Budget 2023, from 6 April 2024 both agricultural property relief and woodlands relief will apply only to property in the UK (which excludes the Channel Islands and the Isle of Man).
Our comment
The extension to agricultural property relief will be a pleasing announcement for landowners where uncertainty has plagued decision-making on entering into potentially lucrative environmental schemes. With ever-mounting pressure on landowners and rural business owners to diversify their income streams, certainty over the preservation of valuable inheritance tax reliefs should help give further clarity to the wider implications of commercial decisions.
With many landowners carrying out diversified rural businesses, further work is still needed to evaluate the availability of business property relief for environmental land management.
Taxation of second homes
Two changes are being made, which aim to increase tax revenues and increase the supply of housing by discouraging short-term lettings and incentivising the sale of second homes. The first measure removes the ‘furnished holiday lettings’ tax regime. The second reduces the higher rate of capital gains tax from 28% to 24% on gains realised on disposals of residential property.
Furnished holiday lets
Many second homeowners and landlords letting their properties on short-term tenancies, use the furnished holiday letting (FHL) regime. This enables them to deduct the full cost of their mortgage interest payments from their rental income and claim for a broader range of repairs and maintenance costs. FHLs can also benefit from being treated as ‘trading’ assets for capital gains tax (CGT) purposes, meaning a variety of reliefs are available. Gains on the disposal of FHLs have been eligible for holdover relief to defer gains on gifts, business asset disposal relief is available to reduce the rate of CGT to 10% in appropriate cases and rollover relief is available to defer CGT on the disposal of FHLs if acquiring other qualifying assets such as more FHLs.
From April 2025, the FHL regime will be withdrawn, meaning that there will be parity of treatment between short and long-term lettings moving forward. Anti-avoidance rules will accompany the change in legislation to prevent property owners from engineering disposals of their properties to take advantage of the current reduced rates of CGT that apply to FHLs. ‘AirBnB’ owners will be affected by the change, as will farmers and landowners who have converted surplus farmworkers’ cottages into holiday homes. Bed and breakfasts, guest houses and hotels are unlikely to be affected by the proposed changes.
Reduced rate of capital gains tax on sales of residential homes
In an accompanying announcement, which came as somewhat of a surprise, the Chancellor announced a reduction in the rate of capital gains tax applying to residential property.
Currently, the higher rate of CGT on gains on disposals of residential property by individuals is 28%. For disposals from 6 April 2024, however, the rate of tax will be reduced to 24%. Main residence relief will continue to apply for disposals of an individual’s main residence and the lower 18% rate, which applies to the extent that gains fall within an individual’s basic rate band, will also continue to apply.
Our comment
A mixed bag for landlords today. On the one hand, a reduction in the CGT rate will be welcomed, particularly as recent Budgets have seen a more singular direction of travel towards increasing the tax burden on landlords.
Those currently benefiting from the FHL rules will, however, suffer the impact of the changes from April 2025. Specifically, the loss of relief for interest on borrowings, could have a significant bearing on the overall tax liability and this may affect the commercial viability of some property business models.
The FHL changes were perhaps not unexpected given concerns around the need to redress the balance in areas suffering a perceived housing bottleneck for local residents and workers. The reduction in CGT, however, was not trailed in advance of the budget.
It does remain to be seen how much of an impact either of these changes will have in driving behaviour. In particular, how far it creates additional capacity in the property market, given that FHLs represent a small percentage of second homes. Property remains an attractive asset class both in terms of yield and capital returns, with the concern that higher tax costs could lead to higher rents as landlords look to preserve those post-tax profits.
For more Spring Budget 2024 analysis
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.
