Business Clinic: How do I plan for tax on retirement farm sale

Whether it’s a legal, tax, finance or management question, Farmers Weekly’s expert panel can help.

Here, Kate Bell, of Albert Goodman chartered accountants, advises on how good planning can help achieve the best tax outcome when a farm is sold on retirement.

See also: Business Clinic: what is best structure tax-wise for arable farm’s future?

Q: I am an owner-occupier farmer aged 70 and plan to retire in the next few years. This will include selling the farm (500 acres mixed Grade 3 land in the Midlands), as well as the livestock and machinery.

I bought the farm in 1984 for £1,614/acre and the land is now worth £9,000-£10,000/acre.

There is also a four-bedroom farmhouse, a decent set of modern buildings and a few traditional brick buildings, which I estimate will add a further £1m, plus about 300 head of sheep and 50 beef finishing cattle.

I have heard that timing is important for tax purposes when ceasing and selling a business, so please can you give me some pointers on this to achieve the best tax outcome.

A: Planning and timing are essential when retiring from farming as several tax events can arise, each with different consequences.

The key tax areas on sales are capital gains tax (CGT) on land and buildings, income tax on livestock and machinery, VAT on deregistration, and the impact on inheritance tax (IHT) once the farm is converted into cash.

However, to gain good advice you need to be clear what you would like to do with the post-sale proceeds.

Capital gains tax

CGT is generally charged on the difference between sale proceeds (£9,500/acre) and base cost (purchase price of £1,614/acre).

This creates a substantial gain together with the farm buildings after deducting any qualifying construction costs. The current CGT rate is a maximum of 24%.

The sale of the farmhouse should qualify for principal private residence (PPR) relief, which can exempt the gain on the home and its permitted curtilage.

For that reason, the valuation split between farm buildings and the farmhouse is important.

If you cease trading before exchange of contracts, business asset disposal relief (BADR) may reduce the CGT rate on up to £1m of qualifying gains.

The timing of cessation therefore matters and should be planned carefully as it is worth up to £60,000 of CGT. Alternatively, if retirement means downsizing, you could consider rollover relief to defer the CGT.

Income tax

Income tax applies to taxable farming profits, with rates from zero to 45% and an effective rate of more than 60% if profits are between £100,000 and £125,140, because the personal allowance is withdrawn in those circumstances.

Farmers’ averaging can sometimes reduce the effective rate by spreading profits over two or five years, but it is not available in the year the trade ceases.

Profits on the sale of livestock are normally taxable where the animals are held as trading stock, though the production herd or flock may be tax-free if held on the herd basis.

Machinery sales can also create balancing charges where capital allowances were claimed on purchase, increasing taxable profits.

This means the timing of the sale of livestock and machinery, and the cessation of trade, is important.

Selling everything in one year may push more income into higher rates, whereas earlier planning may produce a better result if farmers’ averaging can be used.

VAT

When taxable supplies stop, such as sales of livestock, machinery and crops, VAT deregistration should be considered.

If business assets are retained personally after deregistration, there may be a VAT charge as if they had been sold.

You should also consider VAT on the farm sale if an option to tax is in place.

Inheritance tax (IHT)

At present, the business may benefit from agricultural property relief (APR) on qualifying agricultural property and business property relief (BPR) on relevant business assets.

This could mean that £2.5m of the estate is tax-free and that the remaining qualifying assets receive a 50% discount for IHT (giving a 20% effective rate).

However, once these assets are converted into cash, they may become subject to IHT at 40%.

Depending on your circumstances after the sale, gifts of cash may also be considered.

These may fall outside the estate after seven years, and gifts out of surplus income (investment income you may generate going forward) can be effective immediately if the conditions are met.

Conclusion

Retirement from farming is an important planning area.

Clarity on use of funds post-sale allows a co-ordinated discussion with your accountant, solicitor and other advisers to help you plan the sale and cessation of trade in the most tax-efficient way.

The potential tax cost on sale is significant, but careful planning can save substantial sums. In particular, the timing of cessation, BADR and the treatment of trading assets may materially improve the overall outcome.

In short, substantial gains can create substantial tax exposure, but good advance planning can make a big difference.

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