Many farm families are asset rich but cash poor. However, the releasing of cash from farm assets has tax consequences, which requires careful tax planning.
This applies whether a whole farm sale, a machinery sale, stock reduction or complete disposal is being considered and all taxes are involved: vat, income/corporation tax, capital gains tax and inheritance tax.
There are many tax planning opportunities and reliefs available to ensure that the correct, but least, amount of tax is paid and the maximum amount of cash is retained.
Each individual has an annual capital gains tax allowance, currently £11,800. This could be used to minimise tax, on the sale of a small parcel of land, so in the case of a husband and wife partnership, it would be worth holding the asset in joint names to avail of each allowance. A second option is to offset the gain against a capital loss: for example, the diminution in value of milk quota. Capital losses can be carried forward without time limit.
Another capital gains tax relief is roll-over relief whereby the sales proceeds of a business property are re-invested in acquiring another business property within specified time limits. However, this relief is less attractive if the objective of the sale is to release and retain cash because of the requirement for most of the sales proceeds to be re-invested.
A final capital gains tax relief which reduces the rate of capital gains tax payable on eligible gains to 10 per cent by individuals only is entrepreneur’s relief; it does not apply to companies. In order to be eligible for entrepreneur’s relief, there must be a substantial disposal of business assets which has major and quantifiable impact on the farm business.
The sale of machinery and equipment is perhaps where enormous and unexpected tax liabilities may arise. This is because we have had a very generous capital allowances regime allowing farm business to claim 100 per cent annual investment allowance on qualifying purchases of machinery and equipment. The effect of claiming the allowance is that when the item of machinery or equipment is sold, it has a nil value for tax purposes and, consequently, the sales proceeds, excluding vat, are taxable. If the farm business trades as a sole trader or partnership, the machinery sale could result in pushing the individual into the higher and additional rate tax bands: 40 and 45 per cent.
The second area where an unexpected tax liability may arise is in relation to the disposal of livestock where the sales proceeds are significantly in excess of the livestock value in the annual accounts of the farm business. Where farmers are proposing to sell breeding stock the election for herd or flock basis may result in the sale proceeds from the disposal of the breeding animals being tax free, if specific conditions are satisfied.
The sale of farm assets creates the opportunity to release cash but has tax implication. Options to minimise tax include utilizing losses; paying into a pension; electing for herd basis for breeding animals; changing the business structure to a limited company and reviewing profit averaging either two years or five years. Whichever option or mix of options is considered, timely advice and the maintenance of appropriate evidence are critical to support a claim for tax relief.
For further information, telephone (028) 8224 1515.