A recent report by online farming experts, Farmers Guardian, suggested that only 1 in 5 farms in the UK is making a profit from farming activities. These results have led most farmers to consider how they can maximise profits from the land they own, but most are unaware of the significant tax implications these decisions have.
As well as profits from farming activities, farmers have looked to generate additional income through:
- Commercial property lets
- Holiday lets
- Farming joint ventures
“Only 1 in 5 farms in the UK is making a profit from
Income and profits generated by farms, for tax purposes are predominately split between trading profits and rental/investment profits and there is a significant difference in the tax position of each.
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 rental income, 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 entrepreneurs’ relief and any gain would be subject to 10% tax. 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 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.
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 etc.
“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
Dave Gosling – Partner
Menzies have acted for a farm for a number of years and they have recently sold the land for development making a significant gain. The farm had a number of income streams including farming activities, residential property income and commercial property income. The income from the non-trading activities far outweighed the farming income.
Menzies undertook an exercise with the client to fully understand the business and different income streams and to advise on the tax position of the sale. We also ensured that all the necessary documentation was maintained to demonstrate a trading business and that the accounts and tax returns were prepared in the correct way and the farming business cessation was undertaken in a correct order.
The work undertaken has saved in excess of £2.5m for the client.