Top tips for tenant farmers on staying tax smart
Tenant farmers face a number of tax issues specific to their sector, which are often overlooked in general farm accountancy practice. Old Mill’s Andrew Vickery, an approved accountant for the Tenant Farmers Association in Devon and Cornwall, offers his top tips
Nobody wants to pay more tax than they have to, but mitigating tax in the tenanted sector can be particularly complex. However, the benefits of doing so can be considerable, so it is worth seeking expert advice when facing times of change.
Rent reviews, while not exactly a tax topic, do have a significant impact on farm profits. This year’s higher commodity prices have triggered a spate of rent reviews, with landlords keen to cash in on better returns. But soaring input costs have gone some way to eroding those profits, and with Russia back in the grain export market, it is easy to see how quickly things can turn around. It is, therefore, vital that tenants don’t just look to comparable farms to agree rates, but appraise their own businesses to see what level of rent is sustainable.
Saving tax on profits
Having minimised rental outlays, farmers must also consider how to mitigate income tax – the biggest headache for most in the industry. While profits will always fluctuate each year, those that are making money must consider how to minimise the tax they pay.
An increasing number of Old Mill’s clients are considering converting to a limited company, because of the savings that can offer. While historically this was only advocated for those paying personal tax at the higher rate, it is now a realistic option for many other businesses.
The reason is that a “small” company, earning profits of less than £300,000 a year, will pay a flat rate of 20% Corporation Tax on profits from April 2011. In contrast, sole traders or partnerships will suffer a combined tax and National Insurance rate of 29% at basic rate, or 42% above the higher rate threshold. For a partnership with business profits of £50,000 a year, creating a limited company could therefore save £3,200 a year in tax.
Another timely reminder is that the reduction in tax allowances on machinery purchases from April 2012 is fast approaching. Anyone planning such expenditure in the next few years should consider bringing it forward to maximise the relief available.
Surrendering land or tenancies?
The spring and summer months normally bring a number of farms to the market, and this year has been no exception.
Tenants who have been offered compensation to surrender their tenancies in advance of a sale may face a considerable Capital Gains Tax burden.
Ideally, they should make use of Entrepreneur’s Relief, to cut the rate of tax from between 18% and 28% to 10%; a significant saving. However, to access that relief there generally needs to be a cessation or disposal of a trading business. And while the qualifying criteria can be triggered quite simply in most cases, the timing of that change is vital, as it must take place before the tenancy is surrendered or the asset sold.
The rules are quite complicated, so anyone in this situation, or who is considering selling capital assets used in their business, should take advice at an early stage, and well in advance of any documentation being signed. The savings could extend to tens of thousands of pounds.
• For more information contact Andrew Vickery on 01392 351314.