High cow prices, rental increases and potentially expensive environmental legislation in the pipeline, mean those seeking to retire could do well by making that decision this spring.
“A year ago dairy cows were worth £500-£1000 a cow with followers at £600-£700,” says John Allen of Kite Consulting. “At today’s prices, with commercial cows making up to £1500, the average 120-cow herd plus followers would be worth £60,000-£80,000 more.”
Land rental values have also risen by up to £124/ha (£50/acre) over the past year, so that could generate an extra £10,000 a year in rent from an average 80ha (200-acre) farm if you decided to let it out, adds Mr Allen.
“If you’re thinking about retirement you ought to bring those thoughts to mind now. You haven’t made any silage yet, and could either sell the herd this spring, or graze them over the summer and sell them in the autumn.
“Nothing is cast in stone – a lot more animals are being put into calf to Holsteins so in three years’ time we could have an excess of Holsteins around, which would knock the price of stock. Prices are volatile and I wouldn’t like people to miss out on the opportunity that lies there at the moment.”
This is particularly relevant to those who missed out on selling milk quota when it was worth a lot of money.
Many people who are thinking of retiring have older units requiring investment, particularly given the proposed extension to Nitrate Vulnerable Zone regulations, which are forecast to cost the average dairy unit £40,000 in additional slurry storage and infrastructure.
But because of rising milk prices and improved profitability, some producers are hanging on longer than planned before retiring. “The rate of exit from the industry has been 6-7% a year for the past few years and that has slowed to about 5% over the past 12 months as milk prices and profitability have improved,” says Mr Allen.
“But in a few years’ time prices could be different, and rather than wait for all your neighbours to be under pressure from NVZ requirements, you should think about your options now,” he adds.
Anyone contemplating retirement should meet with their accountant to plan the most tax-efficient and workable solution for the future.
The most important consideration for many will be to mitigate their inheritance tax (IHT) liability, says Catherine Vickery, rural tax specialist at accountant Old Mill. “Farmers benefit from 100% Agricultural Property Relief (APR) and Business Property Relief (BPR) upon death – but only if they are farming the land.
“If the land is let out on a Farm Business Tenancy then the land qualifies for APR, but the farmhouse does not. BPR will also not be available on, say, land which has development potential.”
The best option may be to let the land on a grass keep or contract farming arrangement, so that the owner is still officially farming, and therefore eligible for APR and BPR on both the land and farmhouse. “However, you must ensure the arrangement is sufficiently robust – take advice to make sure it is correctly structured, formalised in writing, and that the owner maintains the land,” says Mrs Vickery.
Anyone wishing to sell their land or house can reinvest the capital within three years into other assets eligible for IHT relief. Any assets which do not qualify for tax relief will be taxable upon death at a rate of 40%. However, the first £300,000 of a person’s estate will be tax-free, giving a couple £600,000 of assets to pass on tax-free.
Another important consideration is Capital Gains Tax. “In recent years farming businesses have benefited from Taper Relief and Indexation Relief, reducing the effective rate of tax on asset disposals to a maximum of 10% in most cases,” says Mrs Vickery. “But from 6 April, 2008, that regime will be replaced with a flat rate of 18% – an extremely costly hike for many businesses.”
However, those who have made a capital loss on their milk quota value, for example, could crystallise that loss in the same tax year to offset against their tax bill, she adds.
Anyone ceasing to trade and selling their business assets can also make use of the Chancellor’s new entrepreneur’s relief. This will provide a special tax rate of 10% on the sale of businesses, up to a lifetime limit of £1m. However, assets must be sold within three years of retirement to qualify for the relief, warns Mrs Vickery.
Other factors to consider include income tax on herd dispersals and rental income. “The sale of cattle is free of tax if a herd basis has been used. But followers are taxable upon sale.” For an average 120-cow herd, the sale of 75 followers at £650 a head would generate a tax bill of almost £11,000.
“Whatever changes you are considering, it is vital to take professional advice at the planning stage, to make the most of your financial situation both now and in the future.”