Farmers and farming related businesses are no doubt still coming to terms with what life post Brexit, what will it mean in terms of commodity prices, exchange rates and Basic Payment Scheme subsidies. On a positive note, we are seeing second hand machinery prices holding up very well.
With all of these changes now coming into play, now is the time to ensure that you are optimising your tax position during these turbulent times.
Some of the more important and topical areas and issues:-
Profits from farming can vary over the years due to various external factors including the weather, changes in commodity prices, currency fluctuations, and disease. This can result in peaks and troughs in profits with some years falling into higher rates of tax.
An averaging election has historically allowed the profits of two consecutive years to be spread and can result in significant savings in income tax and national insurance.
From April 2016, an extended averaging election can allow the profits over five consecutive years to be smoothed. Results for the tax year 2016/17 can now be averaged with the previous 4 years.
Averaging is available on an individual taxpayer basis and so where partnerships are involved, each partner should be reviewed in their own right. Further tax savings can be achieved by getting the profit sharing ratio correct.
Whichever type of livestock you are dealing with, ensuring that end of year stock valuations are correct can also result in tax savings.
Valuations are not always straight forward, and farmers will often provide their own valuations. However H M Revenue & Customs do provide a concession that cattle may be valued at 60%, and sheep at 75%, of the last sale price. Both methods should be considered to ensure the most tax advantageous method is used.
There is no doubt that some farming clients are not always profitable. However, where the farming trade is deemed as “hobby farming,” losses arising can only be set against the individual’s other income for a maximum of 5 consecutive tax years. This position needs to be reviewed regularly so steps can be taken.
Herd Basis Election
For many farmers, the value of their business is tied up in their herd or flock. These are the livestock that are used as capital assets, and not trading purposes.
By making a “herd basis election,” when the trade ceases, or a substantial part of the livestock is sold, the profits arising on the sale of the herd can be exempt from income and capital gains tax.
Many farmers will base their retirement plans around this exemption, so it is imperative that this election is considered.
Farmers and landowners may have acquired their entitlement to Government subsidies by way of payment. These are capital assets and you must be aware that any disposal could be subject to capital gains tax. The timing of any disposal could be crucial in order to achieve the lowest rates of tax.
We are still seeing instances of farmers receiving, or having received, compensation for livestock losses due to TB. It must be remembered that such compensation can be spread forward by 3 years so as to lessen the impact of a taxable receipt in the year of the compensation.
Longer Term Planning:-
Whilst the above points are relevant on an ongoing, often annual basis, farmers and landowners need to be aware that the largest tax liabilities they will ever encounter are likely to be incurred due to a failure to plan for succession and/or death. If you have any concerns you should speak to one of the many farming specialists within the Baldwins team.
Historically, farmers have passed their farm to the next generation. The structure of this should be considered to ensure no unexpected capital gains tax liabilities arise.
Land owing clients could have a considerable capital gains tax liability should they sell their farm on retirement.
Entrepreneur’s Relief (ER) could be available, but is not guaranteed and each case needs to reviewed on its own merits. Baldwins are happy to undertake such reviews.
Most farmers will have heard the term “Agricultural Property Relief” (APR), but it is dangerous to assume that simply by having an agricultural trade, an individual will automatically qualify for this relief.
Not having the correct business structure in place could result in the loss of this generous relief.
Some questions to consider are:-
- Are the land and buildings held by those undertaking the farming trade?
- Are they shown in the trading accounts?
- How is the farmhouse used?
- What is the “character” of the farmhouse?
APR is only available on the agricultural value of assets and so where land has significant development value we must try to ensure that Business Property Relief (BPR) is also available. Again the structure of the ownership of assets is crucial to the qualification for this relief and should be reviewed.
Where clients non farming/trading activities such as letting of farm cottages are undertaken, it could be possible to achieve BPR on these activities, again provided the right structure is in place.
How the Tax Team can help:-
The taxation of farming activities is a complex one and the advice required will generally be bespoke to an individual’s own specific personal circumstances.
We would urge you to contact our Specialist Tax Team, for us to undertake a full review of the facts in order to ensure the appropriate reliefs are not overlooked.