How to minimise your tax bill when cashing-in farm assets

Many farmers are re-evaluating their capital assets and machinery fleet in an effort to cut costs and free up much-needed cash right now. But it’s essential to plan ahead to mitigate tax bills.

Whether you’re considering a whole farm sale, a machinery shake-up, or releasing capital from the sale of smaller land parcels, tax may not be at the forefront of your mind.

Failure to plan ahead could mean that the critical cash injection is smaller than expected due to unforeseen tax bills.

Releasing capital

Faced with continuing low commodity prices, battening down the hatches is simply not going to be enough for some businesses.

If a farm has a small parcel of land that could yield a profit, it is essential to consider what tax reliefs are available.

Every individual has an annual capital gains allowance of £11,100, so in the case of a husband and wife partnership, it could be worth holding the asset in joint names to make use of each allowance.

See also: How to manage tax when your farm income has dropped

The second option is to offset the gain against capital or income losses within the farming business.

The most common option is to offset against milk quota losses following its abolition in March 2015.

Capital losses can be carried forward until death, whereas income losses must be made in the same financial year.

Rollover relief

Another useful allowance is rollover relief from capital gains tax, usually used to roll investments back into the farm tax-free following an asset sale.

If you need to make an investment in the farm, this will be very valuable – but it can also be used where you have overstretched yourself by recently putting up a new parlour, for example.

The capital gain made from the sale of an asset this year can be rolled back into an investment made in the previous year.

However, the relief is much less likely to work if the aim is to release cash from a sale, to repay debt or for working capital, because of the requirement for most or all of the proceeds to be reinvested.

Entrepreneur’s relief

Entrepreneur’s relief reduces the tax on qualifying capital gains to 10%.

This is applicable only to individuals, not companies, and extends to capital gains up to £10m over a person’s lifetime. It is especially useful if you’re making substantial sales.

However, from 6 April 2016, capital gains tax rates have dropped 20% for higher rate taxpayers and 10% for basic rate taxpayers. So if you’re only making a small gain and remain in the basic rate tax band, it’s not worth applying for.

Beware profit on equipment sales

Many farmers are re-examining their machinery fleet, whether replacing expensive kit with cheaper alternatives or as part of a whole farm sale. But this is where enormous, and unexpected, tax bills can arise.

We have had very generous capital allowances in recent years, enabling farmers to write off 100% of qualifying purchases in the first year through the Annual Investment Allowance.

However, when you sell that machine, it has a zero value for tax purposes, so you’re essentially making a profit, which will be taxable.

For example, a tractor bought two years ago at £50,000 – all of which was written down for tax purposes – if sold now for £35,000 would crystallise a £35,000 taxable profit.

The same would be true of milking parlours, combines and so on.

So in the case of a whole farm sale, the tax liability could be huge, potentially pushing individuals into the higher rate tax band of 45% (liable on profits higher than £150,000).

Plan carefully for large sales

If you are considering a large sale, you need to understand the magnitude of the problem.

Options to mitigate that tax include offsetting it against losses, paying into a pension, or perhaps changing your structure to that of a company.

This would allow you to make use of lower corporation tax rates of 20%, due to drop to 17% by the end of this parliament.

Another area that can create unexpected tax liabilities is the sale of stock – whether that’s livestock or corn. Typically, people value stock on the books extremely conservatively, so when they sell it they’re likely to crystallise a significant profit.

Where farmers are selling breeding livestock they should consider changing its classification to the flock or herd basis, making profits on those animals tax free.

There are considerable savings to be made. It just requires a bit of forward planning.

Andrew Vickery is head of rural services at accountants Old Mill