The Scottish agricultural sector is potentially facing one of the biggest shifts in legislative and budgetary frameworks in a generation.
Fears are growing that the agriculture fund could be cut after years of underspending and the upcoming Budget is set to outline new rules on taxation as part of the Government’s pledge to stabilise the economy.
For rural landowners, potential changes to Inheritance Tax (IHT) and Capital Gains Tax (CGT) frameworks, could also have a substantial impact. This coupled with other ongoing legislative reforms, creates an uncertain path ahead.
The Budget
At the centre of concerns are the widely utilised Agricultural Property Relief (APR) and Business Property Relief (BPR), changes to which will have significant impact on estate planning.
Under the current framework, APR and BPR offer up to 100% tax relief on qualifying assets such as agricultural land, forestry and mixed-use estates when passed to the next generation, thereby securing substantial tax savings. They are important tax reliefs that have enabled many landowning businesses to preserve ownership in families, avoiding the sale of assets.
Similarly, Capital Gains Tax (CGT) Holdover Relief has been crucial in enabling families to defer tax burdens when gifting business assets and has been a fundamental tool for rural estate planning. It is very likely that changes to CGT will come into effect, and this will impact the ability to be proactive with succession planning without triggering immediate tax liabilities. These changes will be particularly concerning for families that are asset rich, but cash poor.
There is also speculation that the so called “Balfour Test”, which dictates whether landowning estates qualify for BPR based on business activities conducted on the land, could move from a 50:50 to a 80:20 test. A more stringent ratio will impact those who derive income from non-trading activities such as residential lettings, certain renewable energy projects or third-party land use, and many could find themselves facing an increased tax burden when passing on operations.
Legislative shifts on the horizon
In addition to the Budget, there are several other policy shifts on the horizon that could reshape the sector, including land reform and changes to agricultural subsidies.
In Scotland, land reform continues to be a priority at Holyrood, and a new Land Reform (Scotland) Bill is currently progressing through Parliament. This legislation is expected to introduce further reforms aimed at improving tenant farming rights, promoting environmental sustainability, and increasing transparency in land ownership.
However, the changes are set to complicate things significantly for large landowners. For example, the bill may introduce substantial red tape to the sale of part of landholdings over 1,000 hectares, with Scottish Ministers effectively having to approve the decision.
Land Management Plans are also being considered to increase large landowners’ engagement with local communities. If enacted, landowners would be obligated to inform the local community as to their plans for managing their estate and to consider “reasonable” requests to lease their land or any part of it, including buildings, to the community.
Furthermore, following Brexit, UK farmers are no longer subject to the European Union's Common Agricultural Policy (CAP), and the new Post-Brexit Agricultural Subsidy Regime is due to take effect in 2026. The uncertainty surrounding this new system is creating anxiety among landowners and farmers, many of whom have relied on CAP subsidies to maintain profitability. While the specifics of the new subsidy regime are still being worked out, it is likely that the proposed changes will encourage more sustainable farming practices, which could come with increased costs and further impact land values.
Navigating the “Perfect Storm”
The rural sector has long been defined by resilience and adaptability, but the road ahead is undoubtedly uncertain. While it would be premature to declare these developments a "perfect storm," the combination of potential tax reforms, subsidy changes, and land reform presents significant challenges for rural landowners. For many, the IHT reliefs of APR and BPR, along with CGT Holdover Relief, have provided vital mechanisms for intergenerational succession planning, allowing family farms and estates to remain intact. Without these, or if their availability becomes restricted, the future of many family-run rural businesses could be put at risk.
The next generation of rural business owners must therefore adopt a forward-thinking strategy. Working with expert advisers to explore contingency plans, considering diversification within the framework of trading activities, and recalibrating long-term financial and operational strategies will be crucial in navigating what could be a difficult path ahead.
Originally published in the Scottish Farmer 13 October 2024
