Deciding whether to maintain and repair the farmyard, farm buildings and machinery or invest in improvements can be difficult. Any available tax relief must be maximised. Tax relief can determine whether a proposal to build or refurbish farm buildings is financially viable.
If you have Rollover Relief sums to reinvest, improving an existing asset could be tax-efficient, rather than becoming involved in a bidding war on a possible land purchase. This could save both Capital Gains Tax and Income Tax.
Is the expenditure a repair or an improvement?
The cost of repairing an existing asset can be offset in full against profits in the year incurred. For example, replacing a barn roof or resurfacing an existing track is likely to be classed as repairs as long as there is no element of improvement, and the work just brings the asset back to its original condition. If an asset is altered, improved or replaced, the expenditure is classed as capital expenditure. Tax relief can be obtained through various types of Capital Allowances:
- General plant and machinery can be written down at a rate of 18% per annum
- Integral features such as electrical systems or water heating systems can be written down at a rate of 6%
Annual Investment Allowance (AIA)
You may be able to claim the Annual Investment Allowance (AIA) giving 100% allowance up to £1m of cost. This allowance was due to decrease to £200,000 on 1 January 2021 but now continues at £1m for a further year to 1 January 2022.
Structures and Buildings Allowance (SBA)
Any expenditure on items which are structural i.e. buildings and fixed items such as walls and floors used to not qualify for Capital Allowances. However, in 2018 the government introduced a new Structures and Buildings Allowance (SBA) to encourage investment in buildings. When the allowance was created it was set at a flat 2%, however, in the 2020 budget, the Chancellor increased this to 3%.
This new SBA allowance gives tax relief on building a new structure and renovation or conversion of an existing structure. It covers not only farm and livestock buildings used in the farming business but also non-residential rental properties such as commercial offices or storage. It also applies to structures such as roads, fencing and tunnels. Residential dwellings are excluded. The allowance does not cover the cost of the land itself or any fees for planning permission.
Broadly, the allowances are available for any qualifying expenditure incurred or contract entered into, from 29 October 2018. To claim SBA an allowance statement must be created. If you are the first person to use the structure, you must create a written allowance statement before you can make a claim. If the building is then sold, subsequent purchasers must obtain a copy of the statement to claim any remaining allowances, and your allowance stops.
Capital Gains Tax implications
It is important to consider the interaction with other possible tax reliefs. When claiming SBAs, the base cost for Capital Gains Tax (CGT) is reduced by the amount claimed each year. The benefit gained from the SBAs will eventually be clawed back through an increased future CGT liability. Therefore, the process of claiming SBAs is purely a cash flow exercise, with no permanent tax benefit apart from differences in tax rates.
Structuring you Capital Allowances claim
Having multiple types of reliefs and allowances is beneficial, but to maximise the benefit available from new construction projects, the correct procedure should be followed to save the most tax:
- First, identify any costs which are eligible for plant and machinery allowances. Claim these at the highest rate of relief available of either Annual Investment Allowance (AIA) (100%), general pool items (18%) or integral features (6%)
- Then look to identify any costs (minus land) that qualify for the Structures and Buildings Allowance (SBA) at 3% from April 2020 (previously 2%)
Ellacotts can help maximise your tax reliefs for your farming business
Detailed invoices and quotes are important to support any Capital Allowances or indeed repairs claim. These need to split out the functional plant, such as feed barriers, grain dryers, gates, and any repairs, say to existing concrete, rather than one general invoice ‘works to new cattle shed’. Without these detailed invoices, it will be hard to prove which parts of the construction are eligible for the specific allowances and reliefs.
Once again, it comes down to a forensic analysis of the farm expenditure to maximise tax relief. We understand how complicated this process can be. Our team of experts will be pleased to help ensure that you are taking full advantage of these reliefs.