Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.

While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.

 

 

Inflation – 2.3% in October

It is reported that this was largely influenced by higher energy bills coming into the winter months. Although it was higher than the 2.2% predicted, year on year the figure was down from last October’s 4.6%.

Household energy bills rose by 1.3% in October, with the annual rate rising by 5.5% overall.

Electricity bills rose by 7.7% in October, while gas prices were up 11.7%. Despite these large increases, gas was 36% lower than the 2022-23 peak while electricity was 22% below.

However, gas is 88% and electricity is 56% higher than the price in March 2021.

But 2.3% inflation is only slightly above the Bank’s 2% target.

Although this rise in inflation was expected, some believe it will not be a deterrent for the Bank of England to delay further cuts in the base rate.

 

 

Farming IHT Relief

Chancellor Rachel Reeves has restricted the formerly favourable IHT reliefs for farmers.

She is limiting 100% agricultural property relief (APR) and business property relief (BPR) to the first £1m of value. Above that threshold, there will be 50% relief on qualifying assets, giving an effective IHT rate of 20%.

Farmers tend to die with their boots on, unlike many other business owners who step back or sell and retire.

It is likely that all but the smallest of farms will be hugely impacted by these measures with forecasts that there could be a significant amount of disposals in order to fund the death taxes. Normally you would expect a farm to pass down the generations.

The change will take effect from April 2026.

The £1m allowance is likely to only cover smaller farms and not significant, yet family owned, commercial farming operations. Maximising the benefit of the £1m threshold is one of the first planning considerations, although at this stage it is difficult to see whether that limit may yet be amended.

The £1m 100% APR/BPR threshold will apply in addition to existing nil-rate bands, and transfers between spouses and civil partners will continue to be IHT-free.

The limit applies to transfers both in lifetime and death, and any unused allowances will not be transferable between spouses so careful planning is called for.

Independent of this £1m threshold, personal nil-rate bands are being frozen for a further two years, until 2030. This means that the first £325,000 of any estate continues to be inherited tax-free. This can then rise to £500,000 with the aid of the residential £nil rate band if the estate includes a residence passed to direct descendants.

Previously there was little tax incentive to pass farms down the generations. These ageing farmers may well now be too old to make that move and live the 7 years to see the value drop out of their estate for IHT.

There will inevitably be a restructuring of many farming businesses. Moves that we are likely to see include making sure that spouses both have interest in the farm so that they can independently leave that down, and each benefit from the £1m exemption.

Transferring value now to the next generation will at least start the 7 year clock running, in the hope that either spouse may survive long enough.

A transfer between spouses attracts no tax. Otherwise, the gift of business assets will allow for any Capital Gain to be held over and the CGT effectively deferred.

However, many farming families will be concerned about the effects of divorce on their own or the next generation. They may well be reluctant to pass over control as a result.

At the moment it is believed that transfers to individuals more than seven years before death will continue to fall outside the scope of IHT. If the capital gains tax (CGT) gift relief rules remain unchanged, then going forward, there is likely to be a visible increase in lifetime gifts by parents to their farming children to mitigate the IHT liability. Holdover relief can be claimed on most transfers where business assets are passing.

It is also important to bear in mind that the new rules apply for lifetime transfers on or after 30 October 2024 when the donor dies on or after 6 April 2026.

Keep in mind that even if you don’t survive the 7 years, you will benefit from the value of the transfer being fixed at the value at the date of the gift rather than at the date of death, and you may qualify for some reduction.

One question that has arisen is what will happen to the value of farmland following a possible flood of farms to the market. This increased supply, combined with farmland now appearing less attractive to farming families, may result in reduced demand and a potential decrease in values.

Action points

There are now action points to consider, for example:

• The current proposals are not yet law and may change before they do so. The finance bill has to pass through Parliament and become a Finance Act. It is likely there will be intense lobbying during that process.
• Consider the desired outcome in terms of who should be carrying on the family business.
• Get up-to-date valuations to ascertain just exactly what IHT might fall due in various scenarios.
• Consider lifetime transfers to fix the current value and start the 7 year clock.
• Update partnership agreements, wills etc to take account of any changes that are implemented.

Other matters to consider:

• Investments held within the farming business may not qualify for any IHT reliefs.
• Land with development value at the date of death may cause a problem. It may result in an IHT liability but no actual disposal yet.

 

 

Making Tax Digital – More Clarifications

What will you be getting in return for increased accountancy fees?

According to HMRC MTD will deliver benefits to you:

• reduce the chance of you making errors, supporting business productivity
• ensure you have up-to-date, accurate information to help with business planning
• move your tax records onto one new system supporting wider improvements now, and in the future, so HMRC can deliver a better customer experience
• make sure you pay the right amount of tax so that more money can go to funding public services, like the NHS and supporting growth across the UK.

HMRC’s response to the quarter-end rush

Basis period reform means that most businesses now have 31 March or 5 April year ends. In addition, MTD quarterly submissions will all be at the calendar quarters. This will cause a significant bunching of work for accountant and HMRC alike.

HMRC’s view is that the quarterly updates are summaries of the totals for each relevant category of income or expense generated by the MTD-compatible software that can be submitted with just the click of a button. HMRC don’t expect all customers will choose to engage agents to make these submissions. It will be for customers to decide the appropriate model for their business.

There will be a significantly increased workload for all accountants as a result of the new system, and HMRC does not seem to be aware of how this works out in the real world.

What will HMRC do when you initially fail to file quarterly updates?

HMRC’s view is that quarterly updates provide information on income and expenditure during that period, with software able to send an estimate of any tax accruing. Submitting quarterly updates will help businesses manage their tax affairs and budget for payments that are due at the end of the year. When the final declaration has been made after the end of the tax year, the calculation of tax due will be confirmed once all other income sources and allowances have been considered.

Penalties for the late submission of income tax returns, including quarterly updates, will work on a points-based system. This means one penalty point will be given for each return submitted late, and a financial penalty will be issued after a points threshold has been met. Using a points-based system for late submissions means customers won’t be financially punished for the occasional slip-up.

What will HMRC do if you are not using appropriate software

HMRC’s view is that customers will need to meet the requirements of MTD IT as set out in legislation and guidance, including those on digital record-keeping. Where that doesn’t happen, HMRC may choose to apply digital record-keeping penalties.

What if the quarter ends clash with holidays etc

HMRC’s view is that when you know that you won’t have any additional transactions to record in the last days of a quarterly period, for example, because you are going on holiday, you can choose to meet your obligations early, by sending your quarterly update up to 10 days before the end of the period.

After the end of a quarterly period, accountants and taxpayers will then have one month and two days to send their updates.

What if you have property that is both jointly and solely owned

Individual owners of jointly held property will not need to report quarterly. The numbers are reported as a single entry for a “property business”.

HMRC have said that there are some changes in regulations and update notices due to be published in the coming months. To reduce administrative burden, the aim is for landlords with jointly owned property to be able to:

• choose not to submit quarterly updates of their expenses related to jointly owned properties to reduce their in-year administration
• submit records before you finalise your tax position at the end of the year
• keep less detailed digital records in relation to jointly owned properties to simplify the transfer of records between them.

If you are both sole and joint landlords you will need to follow the standard requirements for properties that you own solely and you can choose to use these easements for your jointly owned properties.

 

 

HMRC turns down two-thirds of R&D tax claims

It has been reported that 72% of research & development tax relief claims are now rejected by HMRC.

This clampdown follows the introduction of new pre-vetting arrangements for R&D tax claims monitored by HMRC to reduce abuse of the generous tax system.

The rejection rate may not encourage more companies to apply for relief due to the unpredictability of HMRC approving applications.

 

 

Questions?

If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.