Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help. Joe Spencer partner at accountant MHA and Scott Kent, chartered financial planner at MHA Caves offer advice on options for cash deposits.
Q. We’re a busy arable farm partnership with some holiday lettings. We have occasional cash surpluses which can be substantial at times.
We would like some advice on the options and considerations for short-term deposits and savings, now that interest rates have risen.
It would also be helpful to hear what you suggest for cash which can be tied up for a bit longer.
A. We have seen many farmers build up cash reserves following a successful 2022 harvest, though some of those surpluses have been used to fund the 2023 harvest inputs at higher proportions.
Cash funds are beginning to build up again following the completion of harvest 2023.
With the Bank of England base rate increasing from 0.1% in December 2021 to 5.25% in August 2023, banking institutions are offering some competitive rates which will generate good returns of interest on cash balances.
With all investment of cash funds, consideration should be given to how accessible the funds are, should they be required.
We are seeing some higher income tax liabilities due in January 2024 for those operating as sole traders or in partnership, so be careful not to tie up cash for too long.
Consider if it is feasible to extract a proportion of the cash long term – in which case you may consider using ISAs which give income and capital tax-free growth.
Ensure any cash tied up is accessible when you need it, for example for chemical and fertiliser bills in autumn, or tax payments in January 2024.
Be wary of potential penalties to access cash earlier on term deposits.
Remember the tax thresholds (personal savings allowances) for investment income:
- A basic rate taxpayer can generate £1,000 before paying tax (20%)
- A higher rate taxpayer can generate £500 before paying tax (40%)
- An additional rate taxpayer will not benefit from an allowance and will be taxed at 45% on any income.
Rates available in corporate structures may be less attractive to those outside.
Any income generated from cash surpluses is taxable as profits in the company, at corporation tax rates of 19% to 25% depending on the overall profitability position of the company.
There could be no tax payable dependent on the impact of other tax regimes, such as capital allowances.
Remember that post-tax profits will need to be extracted from the company via dividends – the dividend allowance for each individual has dropped to £1,000 for 2023-24
Under all the above business structures, consideration should be given to substantial idle cash held within the businesses as this could be regarded as “excepted assets” for business property relief purposes with a potential inheritance tax impact.
Overnight deposit rates are an option, but we suggest you seek expert advice here.
You will be better to maximise rates via “easy access” or short-term accounts such as 30-to-90-day notice accounts.
Tying up longer term
Structured deposits which are linked to the performance of an index might be useful.
These can provide better rates dependent on the performance of the financial markets, while offering some protection to the initial investment.
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