How maximising profits on your farm can seriously impact your tax position

Dave Gosling - Menzies Accountant

Dave Gosling – H&L Specialist

Recent research conducted by NFU Mutual in July 2023 found that 34% of farmers surveyed have already diversified their farms and many more will be considering this.  Farmers are facing a great deal of uncertainty and increasing financial pressures and therefore they are embracing new ways of making money from existing assets.  However when considering diversification its important to consider the tax implications so that the farmer’s family doesn’t end up with an unexpected tax bill in the future.

As well as profits from farming activities, farmers have looked to generate additional income through:

  • Letting unused farm buildings as commercial property lets
  • Letting unused worker cottages as holiday lets
  • Offering unused fields for camping or glamping
  • Hosting weddings
  • Farming joint ventures

For tax purposes income generated by farms is split between trading profits and rental/investment profits and there is a significant difference in the tax position of each.

Inheritance Tax

When an individual passes away, their estate includes the market value of all their assets and inheritance tax is calculated on the taxable value of this estate.  If they own a farm and it is classified as a trading farm, then the asset should qualify for Agricultural Property Relief on the agricultural value of the farm and Business Property Relief should be available for any excess value of the business. These reliefs are worth up to a 100% saving in the right circumstances.

However if the land is used predominately for investment activities, such as renting holiday lets, then this asset could be subject to inheritance tax at 40%. 

Capital Gains Tax

If you are looking to sell your farm then there is a large difference in the capital gains tax position on the sale, dependent upon the use of the farm.  If the farm qualifies as a trading business then the sale could qualify for business asset disposal relief and any gain could be subject to 10% tax, up to the first £1 million of sales.  However if the farm does not qualify as a trading business, then the gain would be subject to a minimum tax of 20%.

Income Tax/Corporation Tax

There are only minor differences between the income tax or corporation (business) tax payable on the profits of a farm where the profits of the business are classified as either trading or non-trading.

One of the key differences is that if you are a sole trader or partnership then any losses generated from business activities can be offset against certain other income, but rental/non trading losses are much more restrictive.

National Insurance

There is no national insurance payable on non-trading profits, but trading (farming) profits would be subject to national insurance.

There are a number of instances when on the face of it, it is unclear as to whether the farm would be classed as a trading or non-trading business.  It does not simply depend upon which income streams the profits are generated from and you also need to consider other factors, for example,

  • how is the owners time split between the various income streams
  • what is the land use between the income streams
  • what is the general perception of the farm by an outsider, would they see a working farm or a series of rental properties with land

“It is key that any business which has a mix of income should seek professional advice”

Due to the large asset value of farms, it is key that any business which has a mix of income should seek professional advice, fully understand their position, ensure all business activity is fully documented and accounts prepared accurately, whilst also undertaking any necessary tax planning. 

Brighter Thinking in Action

holiday and leisure graphic

Menzies has recently undertaken a review on a farming estate that has several rental properties as well as farmland and the rental income received far outweighs the farming income.  They spent time with the client and their advisers to fully understand the business and the different income streams.

Menzies has made recommendations to ensure documentation is put in place now to maximise potential claims for agricultural property relief and business property relief in the future resulting in substantial inheritance tax savings.

The work undertaken has saved in excess of £2.5m for the client.

Posted in Blog, Hospitality & leisure