By Murdo Laurie, Armstrong Watson Accountants, Business and Financial Advisers
Farmers and landowners are currently being bombarded with ideas of how they can manage their land differently to produce environmental benefit. For farmers who have been brought up to believe that their role was to produce food, this is not an easy transition. Here I look at the possible tax consequences from signing up to these schemes…
The direction of travel is for some land to be farmed less intensively and other land to be taken out of production completely, but how does this affect Income Tax, Capital Gains Tax, and Inheritance Tax? The definition of farming for tax purposes is “the occupation of land for the purposes of husbandry,” and, in turn, husbandry is defined as “the growing of crops or rearing of animals.”
Income Tax
In most cases annual grants will be taxed as income and will be included in farm accounts. Where a grant reimburses expenditure incurred, such as planting trees or hedges, the grant should be taxed in the same period as the expenditure is incurred. In exceptional cases where there is no farming activity as a result of signing up for a scheme, the income is taxed as “other income”. This has a number of consequences, including a restriction on the offset of losses, inability to average profits, and a restriction on pension contributions.
Capital Gains Tax
The rate of Capital Gains Tax (CGT) payable on the sale of land may be affected by whether the land has been used for business purposes. Similarly there may be a restriction on the ability to claim rollover relief on a sale, or holdover relief on a gift if the land has not always been used for business purposes.
It is possible that land could still be used for business purposes without any farming taking place. This will depend on the level of activities and expenditure required by the landowner to receive the grant.
Inheritance Tax
A working farmer is normally able to claim 100% Agricultural Property Relief (APR) on land and 100% Business Property Relief (BPR) on livestock, stock and other business assets. Land can also qualify for BPR, but the qualifying conditions are more stringent, and careful planning is essential.
Land must be occupied for the purpose of agriculture to qualify for APR. In the past HMRC has stated that land taken out of production can still qualify for APR where there is “an intention or expectation that the land will be back in production in the future”. Whether this applies will depend on the terms and duration of the scheme signed up for.
It is also worth noting that this issue impacts agricultural landlords as well as owner-occupiers. A landlord can qualify for 100% APR if land is in agricultural occupation, but are unlikely to qualify for BPR. This means that a landlord may worsen their Inheritance Tax position if they allow a tenant to sign up for a scheme that involves land being taken out of agricultural occupation.
As with all major changes, taking professional advice at an early stage can help navigate these difficulties.
Please get in touch to speak to our agriculture specialists about the challenges your farm business is facing.
