Our top tax tips for farming families and those in the agriculture sector are below.
1. Business restructuring
The structure of your business can have a considerable impact on your tax bill. Incorporating part or all of your business into a limited company can have a significant tax impact as the rates of Corporation Tax and Income Tax vary between 19% and 60%.
2. Cash flow / borrowings
It helps to get your books in to us early. Tax payments on account can be reduced if there is a reduction in taxable profits, allowing for better cash flow management.
If you have existing borrowings external to a company, consider refinancing to ensure borrowings are in the place where cash is generated, otherwise you may be repaying capital out of taxed profits.
3. Machinery purchases
Annual Investment Allowance (AIA) is a key tax planning tool. It is important that you maximise the relief available by planning the timing of your spending. The current AIA is £1,000,000 (until 31 December 2020). A machinery replacement schedule is an effective tool for planning tax efficient capital expenditure. Be careful of timings when purchasing seasonal kit on hire purchase.
4. Structures and Buildings Allowance (SBA)
Tax relief is available on capital expenditure on structures or buildings used within your trade at a flat rate of 3% per year. Relief will be limited to the costs of physically constructing the structure or building, including costs of demolition or land alterations. Ensure these costs are clearly recorded to maximise the claim available. Where possible split out plant and integral features as 100% tax relief can be claimed on these, e.g. grain store equipment.
5. Succession planning
There are Inheritance Tax (IHT) reliefs available for business and agricultural property. Carefully structuring the ownership of your assets can maximise these reliefs. Changing how wealth is held, for example when land is sold, can have a significant IHT impact. Careful planning is essential. Gifts may be appropriate before assets are changed (e.g. before planning permission sought).
Consider early on how you wish to provide for beneficiaries in your lifetime, or in your Will. Early planning and investment into non-farming interests allows gifts of assets to non-farming children without affecting the farm.
A partnership agreement is vital, and a shareholder agreement for a corporate business. A correctly worded partnership agreement should maximise the IHT reliefs available. Agreements should be reviewed regularly to ensure that they still meet the needs of the business and the family. The partnership agreement and Wills should be reviewed together, as a partnership agreement will override a Will if they are not aligned. Life assurance should be considered to ensure borrowings are covered on death, and any IHT can be paid without straining the family.
We also recommend clients consider “key person” cover to protect the business from the financial impact of losing a key employee/owner/manager whose death or illness would have a significant impact on business finances.
Tax relief on pension contributions can reduce tax liabilities for higher rate tax payers. At the same time pensions can also be used to minimise IHT now that unused pension funds can be passed down the generations. Pension funds can be used to support the business: holding commercial property or farmland in a pension fund means that the asset grows free of any Capital Gains Tax. Rent paid to the pension fund is an expense in your accounts, reducing taxable profits.
7. Farmers Averaging
Profits can be averaged over two or five years. This allows you to spread the volatility of farming profits, minimising your tax liability. Ensure that this is being reviewed on an annual basis when your tax return is prepared.
8. Non-farming Family Members
Ensure that all members of the family are fully utilising their personal allowances and basic rate bands. Can any family members be paid a salary for their administration and bookkeeping help?
Don’t forget children also have a personal allowance; a rented property gifted by grandparents to a trust can be a tax efficient way to pay grandchildren’s school fees.
9. Capital Gains Tax
In addition to your personal allowance, which can be deducted against income, you also have an annual exemption of £12,300 which can be used against Capital Gains. The deadline to pay Capital Gains Tax (CGT) on residential property sales has however been cut to 30 days from the date of sale rather than the normal tax payment deadlines. So ensure that you have spoken to Ellacotts before you sell a residential property. Don’t forget residential property is taxed at 18% or 28% depending on your income levels.
10. Entrepreneurs’ Relief
This relief can reduce the Capital Gains Tax rate from 20% to 10%. However, from 6 April 2020 the lifetime cap reduced to £1,000,000. The relevant qualifying conditions must be met throughout a period of at least 24 months. Ensure that all conditions are met before unconditional contracts are exchanged, otherwise the relief may be lost. Early discussions with us are crucial.