Plan now to cut tax bills for arable businesses
Many farmers will be breathing a sigh of relief on completion of the old tax year – but the earlier they start planning for the current one, the more they are likely to save.
Andrew Vickery, head of rural services at accountant Old Mill, says there are essentially two types of tax planning – the short-term, often last-minute options and the longer-term, strategic considerations.
“Every farm business is likely to have a slightly different year-end, so although we’re at the start of a new tax year, there will still be as much use for short-term solutions as the long-term ones.”
For sole traders and partners, Farmers’ averaging will even out peaks and troughs in profits from one year to the next, says Mr Vickery. “Altering the timing of sales or expenditure can also manipulate profits from one year to another. The pertinent date for grain sales is usually the time of movement to the end user, whether that’s moving from the farm or from a central store.”
Farmers who are seeking to invest in new plant or machinery have a two-year window in which to make use of the currently higher annual investment allowance (AIA) threshold, he adds. “Qualifying expenditure (including labour) can be written off against profits in the first year, up to a maximum of £250,000 a year. Although buildings such as grain stores no longer qualify for agricultural tax relief, any working parts such as driers, ventilated floors, internal panelling and electrics are eligible for the AIA.”
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Expenditure in excess of the £250,000 threshold can be written down at 18% a year, ultimately obtaining the same tax relief, but spread over a longer period of time. “In a business where profits can fluctuate widely, timing of such investments is an important tax planning tool.”
Pension payments are another useful way to reduce taxable profits in any given financial year – but they are also valuable vehicles to invest in the farm and enable succession planning, says Mr Vickery. “Making payments into a self-invested personal pension provides tax relief at up to 50% – any lump sum can then be invested into farm improvements such as a grain store. The farm business then rents the grain store off the pension fund, further reducing taxable profits – it’s an extremely tax-efficient option.”
Currently, sole traders and partners pay income tax at up to 50%, depending on profit levels. Restructuring the business – for example by forming a partnership or bringing in an extra partner to dilute the profits – could reduce tax bills significantly.
“Forming a limited company will slash tax levels to just 20% – although directors will pay personal income tax on drawings, so it is most suitable for those wanting to keep profits invested in the business,” says Mr Vickery. “It is also important to be aware of the possible effect incorporation would have on capital gains tax or inheritance tax liabilities.”
Many family farms have alternative income streams such as let cottages, and there are ways to restructure those assets in an extremely tax-efficient manner, he adds.
“Whenever you consider the structure of a business, you must look at it from every perspective to see how to get the most out of it.” For example, if a farmer owns some let cottages and wants to pay for their grandchild’s school or university fees, it would be more tax efficient to place those cottages into a trust for the grandchild, says Mr Vickery.
“The income then accrues in the child’s name, with the first £9,000 being tax-free each year. That’s a lot more palatable than paying school fees from income that’s already been taxed,” he adds. “Making over the asset in such a way will also reduce the overall inheritance tax liability – with the trust vehicle providing excellent protection against divorce or unforeseen circumstances.”
However, financial planning is not just about minimising tax bills. “It is also important to maximise income from tax credits, particularly during difficult financial times,” says Mr Vickery. “Child benefit – worth £1,055 a year for the first child and almost £700 for each subsequent child – has been reduced for any parent earning more than £50,000 a year, even if the other parent earns nothing. Keeping hold of that money is just as worthwhile as minimising tax paid, so consider your business structure to ensure profits are kept within that threshold.”
