How farmers can make the most of year-end tax savings

With only a few weeks to go until the end of the 2014-15 tax year on 5 April, Farmers Weekly asked accountants for their top tips to help save on tax.

See also: Practical and tax tips for farm diversifications

Peter Griffiths, Hazlewoods

Make full use of annual tax allowances and reliefs – married couples should use both personal allowances and basic rate tax bands.

• For the year ended 5 April 2015, individuals have a tax-free personal allowance of at least £10,000 and a 20% tax band of £31,865. Income between £41,865 and £150,000 is taxed at 40%.
•  An individual with taxable income greater than £100,000 will lose some or all of their personal allowance, giving an effective tax rate of 60% on income between £100,000 and £120,000.
•  Income tax is charged at 45% on income greater than £150,000.

Possible tax planning could include varying profit shares in a partnership or ensuring that year-end planning dividends paid from a company are paid to the spouse with the lowest tax rate, making best use of personal allowances and the steps between tax rate bands.

Child benefit

Child benefit will be restricted where one individual in a household has an income higher than £50,000. Where possible, income should be equalised between husband and wife and partners, to ensure the child benefit restriction is minimised.

Capital gains tax (CGT) annual exemption

Each individual has an annual exemption of £11,000, making the first £11,000 CGT free. Spouses should consider transferring assets to each other before disposal to ensure their annual exemptions are used, which could save tax at 28%.

Accrue for expenditure

For those with a year-end approaching, consider accruing for any business expenditure which has not actually been incurred but which will be made shortly after the year end, for example maintenance of buildings and yards.

David Missen, Larking Gowen

• Ensure that inheritance tax (IHT) annual reliefs are maximised, consider more significant capital transfers while the regime is (relatively) benign.
• Use annual CGT allowances and consider using the enhanced individual savings account (ISA) of £15,000 each. It may be possible to kill two birds with one stone by transferring existing shares into an ISA
• For those with year ends between now and 31 March or 5 April, any building or drainage repairs which need doing sooner or later might as well be accelerated into the current financial year, if reducing taxable profit is the aim.
•  Similarly, check over machinery for tyres that need replacing or repairs which should be done.
• Think carefully about the timing of year-end sales. Profit is only recognised when the sale takes place, so simply deferring a sale until after the year end can reduce profits without significantly affecting cashflow.

Sam Kirkham, Albert Goodman

Pensions

Review your income tax position alongside pension pots to consider maximising pension contributions before 5 April, making use of unused pension contribution relief and minimising higher rate tax. This can save tax at between 40% and 60%.

Up to 100% of earned income (salary or partnership profit) can be put into a pension but there is an annual £40,000 limit. Unused relief can be carried forward for up to three years.

Stock valuations

Many farm accounting years end in March or April and the amount and value of stock held at the year-end can have a significant impact on profits and tax liabilities.

Stock must be valued to identify and carry forward the costs incurred before the year end which will not give rise to income until a later period.

Stock should be valued at the lower of cost or net realisable value and guidelines used by most farms tend to provide for the following deemed costs:

• 75% of market value for harvested crops, sheep and pigs
• 60% of market value for cattle

However, there are other methods including actual cost of production and net realisable value if a profit is not expected to be made. Actual cost of production can result in valuations considerably less than deemed cost, so there is an opportunity to reduce the value of closing stock to bring down the tax bill.

If the deemed cost method is used you should consider the timing of sales at the year end. If high profits are expected this tax year, delaying the sale of a crop until after the year end will result in the value being reduced by 25% in the accounts, with profits delayed until the following year.

Reduced profits and losses

For those expecting reduced profits this year it is important that the tax position for 2014-15 is reviewed early so that the payment on account (due on 1 July) can be reduced.

If you are expecting to make a loss, take advice on the timing of year end income and expenditure to ensure loss relief is maximised. Relief on trading and certain other losses is now restricted to the higher of 25% of net income and £50,000 a year.

Carlton Collister, landtax

• Inheritance tax – consider making gifts within £3,000 annual exemption and £250 small gifts exemption prior to 6 April.
• Review VAT partial exemption position and timing of expenditure if, for example, making repairs to a let cottage. Usually 31 March VAT year review for monthly VAT reclaim farmers.
• Review capital expenditure qualifying for capital allowances (for February or March year ends). The Annual Investment Allowance (AIA) is £500,000 and allows 100% of expenditure  on plant and machinery to be set against income in the same year. The AIA will fall to £25,000 on 1 January 2016. It is important to understand how accounting dates interact with the allowance to ensure that relief is available.