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How will farm diversification affect my tax position?

It all depends on what the business is diversifying into…

If the business is diversifying into other farming activities, for example, from arable farming to poultry farming, there will be little change to the tax position. All income from farming is assessed as one trade for tax purposes and there will be no change in the VAT position, Inheritance Tax reliefs or Capital Gains reliefs.

If the business is diversifying into investment activities, for example, property rental, there can be a substantial change in the tax position. For income tax purposes, the rental profits will be a separate trade which can carry their own tax rules. Generally speaking, rent is exempt from VAT which can lead to a restriction of input VAT reclaimed on overheads. Agricultural and Business Property Relief may not be available at all if the business is not “wholly or mainly trading” and so if the rental business will be larger than the farming business, you should consider restructuring to protect valuable reliefs against the farming assets.

Diversifying into renewable energy can be attractive from a tax perspective as some projects qualify for capital allowances at rates of 6%, 18% or 100% of expenditure. If the energy is used in the farming business, the Inheritance Tax and Capital Gains position won’t change. If the energy is sold, it may be considered an investment activity, which, as mentioned above, can lead to restrictions in reliefs available.

Setting up a trading business will still see changes to the tax position of your business. For income tax purposes, the profits will be a separate trade which can lead to restrictions if one of the trades is making losses or with farmers’ averaging claims. For Inheritance Tax purposes, Business Property Relief will be available on the new trading assets without any tainting of Agricultural Property Relief on the farming assets.

Changing risk profiles for diversification means that you should consider diversifying in a separate entity with limited liability to safeguard the existing business against any claims.

There’s a lot to consider with diversification from a tax and accounting perspective so it’s important to talk ideas through with a specialist to ensure you don’t encounter into any pitfalls.

How does the latest Budget affect agricultural businesses?

On 29 October 2018, the Government announced, the self-called “budget to support new housing, high street and local services”. Despite the title, the budget did have various changes that will affect agricultural businesses.

Changes to capital allowances included an increase in the Annual Investment Allowance (AIA) from £200,000 to £1,000,000 for expenditure from 1 January 2019. The AIA allows businesses to receive 100% tax relief for plant and equipment in the year of purchase up to £1,000,000 which should be ample for typical farming businesses.

Other changes to capital allowances includes the introduction of the new Structures and Buildings Allowance. This allows tax relief against profits for commercial structures and buildings at 2% a year; assets which previously attracted no income tax relief.

In terms of income tax, the personal allowance was set at £12,500 for the 2019/20 tax year and the higher rate threshold was set at £50,000. No changes were announced for corporation tax aside from confirmation that the rates will fall from 19% to 17% from 1 April 2020.

The Government relaxed caps of borrowing to Local Authorities for them to build houses. This may generate opportunities for those who have land with the potential for residential development.

Fuel duty was frozen and vehicle tax saw an increase based on the Retail Price Index.

How will the phasing out of the Basic Payment Scheme effect my farm’s finances?

The Basic Payment Scheme has provided valuable income for farming business, particularly those in the arable sector. The Government has confirmed no changes will be made for 2019 or 2020 and has announced deductions for 2021. The deductions are at rates between 5% and 25% and are staged as with income tax. Farmers can plan for this and should build the deductions into their cash flow forecasts.

Post 2021, deductions will be dependent on Spending Reviews and requirements under the new Environmental Land Management Scheme (ELMS); the Basic Payment Scheme’s replacement once we’re outside of the EU. ELMS may prove a valuable income stream for some farms, particularly those with a heavy focus on the environment. That said, the general consensus is that support will fall and so it is important to take a step back to review the profitability of your business without any support to see if you can make a viable profit.

If you can’t make a profit, you will need to consider what can be done to make it viable. This could involve changing cropping plans for poor performing fields or taking them out of cropping altogether and into the new ELMS scheme, partnering up with others to ensure machinery is used to full capacity or diversifying into non-farming activities or farming activities less dependent on subsidies, e.g. intensive livestock.

Being less dependent on the Basic Payment Scheme may provide more opportunities for increasing income from the sale of crops. Land may be farmed without abiding by regulations which are set centrally by the EU for a variety of countries with very different farming environments. This may encourage more efficient farming and an increase in yields.

The Agricultural Bill explained that the Basic Payment will be de-linked from the requirement to occupy land in the future. This along with the option for a lump-sum payment may provide financing options for those who are already looking to retire from the business. The Government will release a consultation on how this will work later this year which should provide more clarity. We particularly have concerns with how a lump-sum payment would be assessed for tax purposes which could give rise to tax liabilities up to 47% of the payment.

I want to pass my farm onto someone after my death. How do I plan for this?

You should prepare a will to set out who you would like to benefit from your assets (including your farm) on your death.  It is important to think about who you would like to benefit from your assets and what the tax implications might be. Inheritance Tax needs to be considered on death, where a liability arises this can be detrimental to businesses, particularly farms with high capital asset values where there may not be cash available to fund the liability.  To help mitigate the inheritance tax due there are two important Inheritance Tax reliefs which can apply to farms where certain conditions are met.

It is important to review the whole farming enterprise and your personal financial position to identify where Inheritance Tax reliefs are available. Agricultural Property Relief can provide relief against Inheritance Tax at 50% or 100% of the agricultural value of an asset. Where farms are heavily diversified or have non-agricultural value, e.g. hope value for land development, Business Property Relief can provide relief at either 50% or 100% of the value of an asset.

Once your current position has been established consideration can be given over whether you can improve the inheritance tax reliefs available to you and if you should  consider planning giving assets away in your lifetime.

Few people can talk about their deaths comfortably with their family and loved-ones but it is essential to have open and honest discussions so that everyone is aware of your wishes. This is particularly important where you have multiple children, some that are involved in the farming business and some that aren’t.

The rules surrounding Inheritance Tax and the reliefs available are complex and so it is.

I do not currently own any residential property but am now buying a house with a granny annex, will I have to pay the 3% surcharge?

There is a special exemption where a “subsidiary dwelling “ is purchased with a house. As long as the smaller dwelling is purchased in the same transaction as the main dwelling, it is valued at less than one third of the total purchase price and it is within the grounds of the main house then you are not treated as buying two dwellings. However, there may still be an opportunity to benefit from multiple dwellings relief, which can lower the overall SDLT bill.

I am buying the house next door in order to extend my home

The higher rates will apply as following the purchase you will own an additional residential property and is this is not replacing your main residence.  Unfortunately, a refund of the higher rates cannot be claimed once the properties have been merged as refunds are only available where a previous main residence has been disposed of.

My other half and I each own a property, but we both live in my home. We want to buy a new home together, will we be subject to the 3% Stamp Duty surcharge?

The answer here depends on whether you are a married/in a civil partnership or are unmarried. A husband and wife each own a residential property (with neither having any interest in the other’s property) but both live in the property owned by, say, the husband, with the property owned by the wife being rented out. If they sell their main residence and jointly buy a new one the higher rates will not apply to the joint purchase.  As they are married and have both lived in the property owned by the husband as their main residence they will both be treated as replacing their main residence, even though the wife retains the rental property. An unmarried couple (A and B) each own a residential property and both live in the property owned by A, with B’s property being rented out.  If the main residence is sold and they jointly purchase a new one, which will be their new main residence, the higher rates will apply to the joint purchase of a new main residence.  As they are not married (or in a civil partnership) B will not be treated as replacing his main residence as, even though he has been living in the property owned by A, he has no interest in the property A is selling.

If I give my existing home to a family member prior to buying my new main residence, will the 3% surcharge apply?

A replacement of a main residence can be achieved by making a gift of the former main residence, as this still counts as a disposal. However, a gift to a spouse would not avoid the surcharge as neither the purchaser or their spouse can retain an interest in the former main residence in order to be outside the surcharge. Gifts should be considered carefully, as they could create other tax liabilities, such as capital gains tax on disposals, inheritance tax and income tax on future rental income.

I own a residential property overseas, but am buying my first home in the UK, will I have to pay the 3% surcharge?

When looking at the 3% surcharge you must consider any residential properties owned, regardless of where they are located. However, in some case property owned overseas may not cause the surcharge to be payable on a UK purchase, perhaps because the overseas property is valued at less than £40,000, or the beneficial ownership sits within another party. There are many types of ownership, such as certain usufruct rights, which mean that the legal owner would not be treated as owning a major interest in the property, so it would not count for the purposes of the 3% surcharge. If you have an overseas property with unusual rights in place it is worth seeking further advice.

Can I still benefit from Goodwill on incorporation?

Historically, when considering the incorporation of an existing sole trading activity or partnership into a limited company, a big benefit to doing this was the ability to ‘realise’ the goodwill built up in the existing business, and access this value at a low tax rate (if Entrepreneurs’ Relief applied).

Since 3 December 2014 the rules on incorporation and goodwill have gone through significant changes, impacting on both the tax reliefs available on incorporation, and the tax deductibility of the amortisation of any goodwill acquired by the new business.

It is therefore important that when looking at incorporation, the tax position is considered so that there are no unexpected surprises.

What tax will I pay on my share of the profits?

This will depend on a number of factors depending on your personal circumstance and position.

If you are an employee/director in a company or a salaried partner in a partnership (or LLP) you will be taxed, broadly, on the salary and any benefits paid to you during the tax year.

If you are a partner in a partnership or a member in an LLP you will generally be taxable on your share of the tax adjusted profits for the accounting year ending in that tax year (e.g. the profit from the accounts ending 30th April 2018 would be taxable in 2018/19).  However, in the early years of being a partner or member there are special rules which set out what profits you will be taxable on, and also in the final year of being a partner or member.

In addition, things like business expenses incurred personally and pension contributions will have an effect on the amount of tax which you pay.

What operating structure should my firm adopt?

This is a complex question with a number of different options available including

  • A Partnership
  • A Limited Liability Partnership (LLP)
  • A Limited company
  • Or a hybrid mixture of the above entities.

New structures are developing all the time with employee ownership and external investors becoming increasingly popular. The right structure for your business will be dependent on a number of factors including size of the business, restrictions placed by your professional body, attitude to risk, the stage the business is at in its life cycle and the number, age and income requirements of the owners. Whilst tax shouldn’t be the main driver in any business decision the tax implications are extensive and a crucial part of any decision making process. We work with our clients to develop a bespoke solution for every business which avoids inflexible structures and succession challenges whilst maximising tax saving opportunities.

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