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Whether continuing to farm or looking at the SFP as an opportunity to retire from farming or cut down activity there are various IHT planning measures that should be kept in mind to try and protect entitlements to 100% Agricultural Property Relief (APR) or 100% Business Property Relief (BPR) for inheritance tax purposes.
Letting Farm Buildings and other non-farming income?
§ Where possible, include non-farming rental and other related income in your farm accounts, as income that is subsidiary to the main farming business, and the costs of the whole farm property in the Balance Sheet. This may mean having to alter ownership of assets or introducing new partner(s).The aim is to establish the ‘Estate Concept’ introduced by the ‘Farmer Case’, thereby arguing that the rental property(s) are part and parcel of your country estate where farming is still the main activity. If care is taken, all the ‘estate’ assets including rental properties can still qualify for 100% exemption for inheritance tax purposes provided the farm business is still greater ‘in size’ than the non farm business. Size is not just based on turnover but 5 tests looking at the overall picture.
§ If converting farm buildings to residential units to obtain letting income, remember that furnished holiday lettings can qualify as a trade, thereby benefiting from CGT business taper relief and IHT 100% BPR. Permanent letting does not benefit from this unless you qualify under the ‘Estate Concept’. Care is needed, however, to comply with the rules. If you need advice or wish to request our information booklet please call on 01769 572404.
§ Converting your barns may well lose your APR entitlement on the farmhouse if the ‘character test’ is no longer passed – be careful which barns you convert!.
INHERITANCE TAX
Scaling back and letting your land ?
§ If you have a large acreage, farming your land under grass letting arrangements can keep entitlements to APR. If you need advice or wish to request our information booklet please call on 01769 572404. In this case, ensure that farm buildings are utilised for the farming trade, such as storing produce or farm equipment as APR on the value of old buildings can be substantial.
§ If you have a smaller acreage (where the capital taxes office are increasingly looking to deny agricultural relief) it may be best to accept that you may well lose APR on the farmhouse, but to structure things to try and retain it on farm buildings which can be very valuable in their own right, for example, by drawing a tight line around the farmhouse, and letting the land and buildings under a Farm Business Tenancy. The presence of a third party FBT may well reduce the value of the farmhouse too.
§ Following a change of tax rules in April 2004, either of the above should maintain entitlement to full business asset taper relief for capital gains tax, providing the asset is used in the trade by anything other than a quoted company.
§ Always ensure you have a study or office in the house.
§ Consider share farming agreement to retain your ‘trading’ status if you no longer wish to actively farm your land. We have prepared an agreement which should enable land owners to ‘have their cake and eat it’. i.e Stop actively farming themselves but still qualify for 100% APR. If you need advice or wish to request our information booklet please call on 01769 572404.
There are many additional factors to consider in relation to all of the above points, and none of the above points should be applied in isolation. Every case must be reviewed on its own merits and you should consult your taxation advisor before taking any action. With a significant percentage of the areas’ farmers in our client base, our specialised agricultural department is working closely with Nigel Down and Richard Stanbury of WD Farm Consultants and other land agents and farm consultants. We will be pleased to help.
If you wish to discuss any of the above with us then please contact, Ian Smale, Cathy Barrow, Matthew Gard or John Ward on 01769 572404.
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Disclaimer
The contents of this newsletter are intended to inform, not offer specific advice on your individual circumstances. If you think any of the points we have featured may be to your benefit, please contact us for further advice. We cannot accept any responsibility for any financial loss incurred as a result of reading and acting on this newsletter without receiving individual advice and our written endorsement.
now that we have the Inland Revenue rules!
The Rules………………
Income Tax
SFP is
- Liable to income tax.
- Taxed as trading income for working farms.
- Recognised in the accounts at the end of the ten month occupation period. (Normally ending at 30th November, unless otherwise requested).
- Once the occupation period has ended the income should be recognised evenly over the calendar year, for example:
Accounting year ended 30th September 2005, occupation period ten months ended 31st August 2005
§ The occupation period has ended before the accounting date which means the SFP income should be recognised in these accounts.
§ On a ‘calendar year basis’, nine months of 2005 SFP will be recognised in these accounts, with the tax payable by 31st January 2007.
§ Three months of 2005 SFP will be recognised in the accounts for the year ended 30th September 2006, with the tax payable by 31st January 2008.
Capital Gains Tax
- Payment entitlements (PE) are tradable and subject to CGT. However the likelihood of paying tax is significantly reduced by
§ Business Asset Taper Relief.
§ Annual Exemptions (£8,500 for 2005/06).
§ Rollover and Holdover Relief.
Few clients will pay capital gains tax on disposal of PE’s unless significant values arise or unless other capital profits arise in the same tax year.
- A company purchasing PE can claim tax relief annually as amortisation against corporation tax (like milk quota), over the ‘useful life’ of the PE i.e until 2012.
- Farm quotas (except milk) are worthless from 1st January 2005. A negligible value capital loss can be claimed for these at any time, creating a loss to set against chargeable gains.
Inheritance Tax
There are no specific IHT rules. The PE will not qualify for Agricultural Property Relief, but after being used in the farming trade for two years, should qualify for 100% Business Property Relief.
VAT
SFP income is outside the scope of VAT.
Sale of PE is usually standard rated, but there are some exceptions, including where
it is sold as part of a farming business falling within the transfer of going concern rules
(in which case no VAT).
INCOME TAX
Have You Stopped Spending Now The Subsidies Have Stopped Coming In?
With cash flow likely to be tight in the gap between now and the receipt of the new SFP (possibly as late as June 2006?), you could end up in the position where cutting spending but having the SFP included as income in the current year before you receive it leads to unusually high profits and a correspondingly high tax bill!
If any large expenditure is planned such as purchasing equipment, repairs to buildings or machinery, consider contracting for this expenditure before the end of your accounting date in which the first SFP to be assessed. For example a tractor acquired on HP before an accounting date ended 31st March 2006 will gain you a tax deduction of 40% of the cost in 2005/2006, but could enable you to delay the payment until after the SFP has been received.
Change of Dates
· Occupation period normally runs from 1 February to 30 November. However any ten month period starting between 1 October and 28 February can be chosen.
· Where your accounting date is between 31st July and 31st December, how much SFP is recognised in your accounting period will be affected by the date of the occupation period.
· Accounting dates may be changed once every five years.
There is scope to change either the occupation period or accounting date so that the end of the occupation period falls after the 2005 accounting date, delaying the taxation of the SFP. This may be of particular benefit to farmers who have been accounting for subsidies on a cash basis, and therefore are likely to be taxed on some of the old subsidies and SFP in 2005/06.
Tax Planning Examples:
Existing 31 March accounting dates
A change in occupation period would have no benefit. A change in accounting date is of very limited use, as moving the date to earlier in the tax year would create overlap profits which would be likely to diminish any advantage gained.
Change of occupation period
A farmer with an accounting date of 30th November and the standard occupation period could change his occupation period to end in December, thereby deferring all of the 2005 SFP into the following year.
Change of accounting date
If a farmer with 31st January 2006 year end and standard occupation period ended November 2005 changed his accounting date to 31st October 2005 all of the 2005 SPF would fall into the following tax year (2006/07) with the tax being delayed from January 2007 to January 2008.
Farmers Averaging
If the level of profits in the first tax year of SFP are significantly higher than the previous year it may be advantageous to average backwards or forwards to equalise the profits and save tax at a higher rate. For March year ends this will be particularly relevant, provided a sufficient variation in profits arise.
We have noticed an increase in the number of farms being investigated by the Revenue. Although the majority of our clients have little to worry about there are some key areas to consider when preparing annual accounts:
Cash
Make sure that all cash income is declared – the Revenue always look at the level of ‘cash’ available on a regular weekly basis and any gaps are viewed with suspicion. Declaring cash from meat sales, show prizes, house letting, hay sales etc is always advisable- the tax may be insignificant compared with the peace of mind gained.
Private Income/ Capital
Always record on private paying in or building society books the source of personal funds, eg sale of antiques, legacies, gifts etc. The Revenue like to assume unexplained items are undeclared income!
Interest on Farmhouse Purchase/Rent of Farmhouses
If borrowed money is used to buy a farm including the house, a private adjustment should be made on the interest paid in respect of personal living accommodation. This can be avoided on purchasing a farm if a separate conveyance of the house is made with private funds and all borrowings related to the land and buildings.
For rented farms an adjustment of a fair apportionment of the rent paid attributable to the house is also advisable.
Private Adjustments
The Revenue always look closely at private adjustments for vehicles, insurance, running costs and capital allowances on cost of vehicles, personal accountancy fees, produce, use of horses, farmhouses etc.
Stock Valuations
These generally should be at the lower of cost or market value. For animals bought in the year, direct cost (to include feed, vet’s bills etc) should be used. Fertiliser (although not if spread before the year end), seeds, feed, diesel and corn etc should be reviewed and assessed. The Revenue will look at purchase invoices in the months before the year end to see what should be in stock, and at sales of dead stock after the year end to assess the right cost figures. Other items such as tillage’s are easier to argue a lower market value than cost but care is needed.
Although we are progressive with tax planning covering our clients against investigation has always been and will continue to be an important part of our job. This has been bourne out by a very low number of investigations for our clients over the years- many have resulted in no or little tax being paid!
If you wish to discuss any of the above with us then please contact John Ward, Cathy Barrow or Matthew Gard on 01769 572404.
Disclaimer
The contents of this newsletter are intended to inform, not offer specific advice on your individual circumstances. If you think any of the points we have featured may be to your benefit, please contact us for further advice. We cannot accept any responsibility for any financial loss incurred as a result of reading and acting on this newsletter without receiving individual advice and our written endorsement.
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South Molton Office
01769 572404
01769 574744
info@davisons-uk.com
11 South Street
South Molton
Devon
EX36 4AA
