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Farm Tax Update

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Julie Butler - Expert Author

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19th May 2010

It is considered by many that after the plethora of high profile farm related Inheritance Tax (IHT) cases in 2009 that 2010 has so far been somewhat dull, but far from it.  There has been a rush of issues with a farming or agricultural angle with income tax and Capital Gains Tax (CGT) consequences.

-       Furnished Holiday Lets (FHLs) proposed changes being “blocked” by the Tory party and did not enter the Finance Act 2010.  What will the outcome be?

-       Spotlight 8 – emphasis as to the commerciality of the trade and the hours worked so that sideways income tax loss relief could be denied.

-       Dairy Farmers of Britain (DFOB) – tax treatment of loss incurred by DFOB members defined.

-       Capital Allowances - for the pig industry.

-       Entrepreneurs’ Relief for CGT – relief extended to £2 million.

Furnished Holiday Lets

What action should farmers take after the proposed change was NOT included in the Finance Act 2010?  There should be continued dedication to ensure that the activity is a business not a letting activity will help protect Inheritance Tax (IHT) and potentially the income tax and capital gains tax (CGT) reliefs should the proposed changes be reinstated.

Dairy Farmers of Britain (DFOB)

Instead of there being a straightforward tax loss claim for the monies lost there is a tax “twist in the tail” for extra tax due.

DFOB, a producers’ co-operative, went into receivership in June 2009.  About 1,800 farmers were members and all are likely to have lost money when the company failed.  However, it is likely that most of the members end up paying tax on money they never received.

The reason this unfair tax treatment arises is because DFOB was allowed to retain a proportion of the agreed price paid for the farmers’ milk.  Until 27 March 2009, such retentions were shown as balances in ‘Members’ Investment Accounts’, but on that day the balances were cleared by the issue of ‘A’ ordinary shares.  As the ‘Members’ Investment Accounts’ were simple debts, the CGT base cost of the ‘A’ shares was their market value on the day they were issued – which HMRC believes was nil.  Perhaps a lesson to ensure potential tax consequences are formally warned to members.

Further detail on the tax treatment of members of DFOB has been published in Revenue & Customs Brief 01/10 Dairy Farmers of Britain: Tax treatment of shares and debt.  A constant review of new guidance is essential at the decision making stage.

Capital Allowances for the Pig Industry

Where there is bad news for dairy farmers (above) there is good news for the pig farmer with regard to the pig industry.

Following the Government’s decision to phase-out agricultural buildings allowances (ABAs) by April 2011, the Department for Environment, Food and Rural Affairs (DEFRA) approached HMRC to discuss the implications of this change for certain agricultural sectors that are particularly heavy investors in buildings and structures with very short economic lives. 

As a result of the approach by DEFRA, HMRC agreed to prepare some additional guidance, to illustrate the range of assets on which the pig industry might claim plant and machinery capital allowances.  The claim by pig farmers will include enhanced capital allowances for energy saving or environmentally friendly plant the annual investment allowance (AIA), the 40% first year allowance (FYA) for 2009/10 and the write off of small pools.  This is explained in HMRC Brief 3/10, 23 February 2010 which explains the exact range of assets.  It is important to keep a constant review of press releases and guidance.

Entrepreneurs’ Relief (ER)

The increase in the lifetime limit for CGT qualifying for ER from £1 million to £2 million can help the farming industry.  This became effective from 6 April 2010.

The differential between the CGT rate of 18% and the highest income tax rate of 50% from 6 April 2010 has been well highlighted in the tax press.  The large gap gives scope for planning opportunities to convert income into gains.  Those who anticipated a rise in CGT and effected a disposal or sale of businesses assets before the Finance Act 2010 may now be regretting the decision.  The fact that this is a lifetime limit might give scope for further planning in future.  Unfortunately, the £2 million limit only applies from 6 April 2010 and cannot be used retrospectively to cover some or all of an excess gain over £1 million incurred before that date in planning exercises.  The complexities of the conditions that have to be achieved in order to obtain ER do make the relief difficult to be achieved.  ER does not apply to let property (e.g. farmland let under an FBT) and it does not apply to “mere asset” disposals, there has to be a disposal of part of the farming business.

For those farmers wanting to exit the farming industry with a low tax bill or to take advantage of development land opportunities, the £2 million gain at 10% becomes attractive and is considered by many to have sufficient benefit to influence the farming industry as to future farm disposals, partnership restructures and genuine retirement.  The change does increase the scope to pass the farm to the next generation tax efficiently but with very careful planning.

Trusts

A lot of farmers have inherited Trusts and are forced to trade through Trusts; HMRC have increased their support of general Trust queries by updating their contact details on their website.

The HMRC point of contact depends on whether the query relates to income tax, CGT or IHT and also on the type of trust.  HMRC will not be able to answer legal or general tax planning queries.

(HMRC website, 15 February 2010)”

Action Plan

There are currently a lot of changes to the farm tax rules – whilst these were significant IHT concerns in 2009 the 2010 focus so far is based on income tax and CGT.  It is essential to look at tax press releases at these changing times


About the Author

Article supplied by Julie Butler F.C.A. Butler & Co, Bowland House, West Street, Alresford, Hampshire, SO24 9AT.  Tel: 01962 735544.  Email; j.butler@butler-co.co.uk, Website; www.butler-co.co.uk

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd edition) and Equine Tax Planning ISBN: 0406966540.  The third edition of Tax Planning For Farm and Land Diversification will be published shortly. 



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Article Published/Sorted/Amended on Scopulus 2010-05-19 17:51:58 in Tax Articles

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