It is the time of year when farms and farm buildings change hands. Here we explore the tax issues that need to be considered – both Income tax and Capital Gains Tax.
There are three main areas for Income Tax relief on expenditure on buildings, as follows:
Where the expenditure is in respect of equipment within buildings, such as slurry storage facilities, silage clamps, internal shed fittings, etc., tax relief is available in the same way as moveable machinery.
A reduced rate of tax relief is due on certain items within buildings – known as integral features – such as electrical work, air conditioning and water fittings.
Since 2018, a small amount of relief is available on the basic cost of a building – the Structures and Buildings Allowance (SBA) which is currently given at a rate of 3% per year.
The first two categories above enable most farming businesses to claim 100% allowances in the year of purchase. This means that any sales proceeds deemed to have been received will result in increased taxable profits. The position with SBA is more straightforward, as the annual 3% allowance passes across to the new owner on a sale.
The equipment in buildings that change hands can create tax problems and opportunities. Part of the sale price can be apportioned to the equipment or fixtures mentioned above which can result in a tax liability for the vendor, and tax relief for the purchaser. This process is often misunderstood, and the key points are as follows:
Since 2012 an election signed by both parties needs to be submitted to HMRC within two years of the transaction. The best practice is to agree the terms of the election before legal contracts are signed.
The agreed amount does not need to be market value but cannot exceed the original cost that has been subject to a capital allowances claim.
It is not normally in the best interests of the seller to agree a high apportionment as this will increase their taxable profit and result in a tax liability.
If the seller does not co-operate in agreeing an apportionment, it is possible to apply to a tax tribunal and ask them to agree the figure. However, this procedure is rarely used, presumably because the cost of applying to the court is likely to exceed the saving made.
Tax on fittings and equipment is only one of the issues impacting Income Tax bills on a farm sale. The sale of stock and machinery is also likely to create extra taxable profit in the year of sale. The timing of the sales, and the date that accounts are prepared to, are crucial to minimising the resulting tax bill. Advance planning, up to two years before the sale, is essential to optimise the position.
To achieve the most tax-efficient outcome on your farm or farm building sale it is always recommended to take advice from an agricultural tax specialist. Give us a call on 01228 690200 to discuss your options.
