Win

ter

2014

/15

Agricultural FocusSowing the seeds for future prosperity

Business structures

Annual Investment Allowance

Ensure that available capital allowances are maximised

Contents:

Agricultural Property Relief

VAT on property conversions

55% pension “death tax” to be abolished

Year-end planning

GoodwillChanges announced in the Autumn Statementmean that entrepreneurs’ relief is no longeravailable on goodwill upon the transfer of apartnership business to a company owned bythe same individuals. This means that the capitalgains tax (CGT) liability on the value ofgoodwill in such circumstances will be at 28%,not 10%.

This is unlikely to affect the decision toincorporate many farming businesses, as HMRevenue & Customs (HMRC) normally arguesthat there is no goodwill attached to a farmingbusiness. However, the existence of valuablecontracts can mean that goodwill does exist ina farming business, and we have dealt withincorporations of farming businesses where a

goodwill value has been agreed with HMRC, forexample in the soft fruit industry.

Even where significant goodwill does exist, thismay not affect the decision to incorporate andcrystallise a CGT liability at 28%, as this willoffer an opportunity to extract funds at a rateof 28% instead of 42% or 47%. Alternatively, itis possible to hold over any capital gain on thevalue of goodwill to ensure that a tax liability at28% is not crystallised.

Other issuesThere are often other reasons to incorporatethe farming business that can still offer taxadvantages. Where a business is looking toexpand and incur significant borrowings, carryingout such activity through a limited company

Business structures

instead of a partnership enables debt to berepaid out of profits that are taxed at 20%,instead of 42% or 47%, allowing the debt to berepaid quicker.

Additionally, where all the profits being made bythe business are not being extracted, runningthe business through a limited company and nota partnership means that tax is only paid onprofits at a rate of 20%, not 42% and 47%, untilprofits are actually extracted from the business.

A limited company can also offer a structurewhere the individuals owning assets are ‘separated’from the individuals running the business.

Therefore, there may still be good reasons for afarming partnership to consider the use of acompany structure.

Many farming businesses still operate through the traditional structure of a partnership,although there have been many incorporations of farming businesses in recent years. Some ofthese have involved the transfer of the whole business to a limited company, while some haveinvolved the transfer of only part of the business to a company, with a partnership continuing toexist alongside.

Capital allowancesReduction in AnnualInvestment AllowanceThe Annual Investment Allowance (AIA)available on expenditure eligible for capitalallowances is currently £500,000 per annum.This is proposed to be reduced to £25,000 perannum from 1 January 2016. Therefore,businesses planning to incur expenditure to

make use of the current level of the AIA needto ensure that the date of expenditure willqualify for the increased allowance.

For a business with a year end of 31 March, forthe year ended 31 March 2016 the total AIAavailable will be £381,250. However, if noexpenditure is incurred before 31 December 2015then the maximum available AIA will be £25,000.

To make use of the £375,000 available of thecurrent AIA of £500,000 the expenditure willneed to be incurred before 31 December2015.

If expenditure is being made using hirepurchase, the relevant assets would need to bein use before 31 December 2015.

55% pension “death tax” to be abolishedWhat is changing - currently, it isnormally only possible to pass a pension on as atax free lump sum if you die before the age of75 and you have not taken any tax free cash orincome. Otherwise, any lump sum paid fromthe fund is subject to a 55% tax charge. FromApril 2015 this will change, and this automatictax charge will be abolished. The tax treatmentof any pension you pass on will depend on yourage when you die.

If you die before age 75 yourbeneficiaries can take the whole pension fundas a tax-free lump sum or draw an income fromit, also tax-free, either by using incomedrawdown or by choosing to buy an annuity.

If you die after age 75 yourbeneficiaries have three options:

1. Take the whole fund as cash in one go: thepension fund will be subject to 45% tax.However, it has been proposed that thisshould be changed from 2016/17 to thebeneficiary’s or beneficiaries’ marginal rate ofincome tax.

2. Take a regular income through an annuity orincome drawdown: the income will besubject to income tax at your beneficiary’s orbeneficiaries’ marginal rate.

3. Take periodical lump sums through incomedrawdown: the lump-sum payments will betreated as income, so subject to income taxat your beneficiary’s or beneficiaries’ marginalrate.

Who will be affected - anybodywho has a defined contribution pension, e.g.

individual or group personal or stakeholderpensions, Self Invested Personal Pensions, andAdditional Voluntary Contribution schemes willbe affected.

What we say - the good news onpensions just keeps on coming. The abolition ofthe draconian 55% pension death tax, togetherwith flexible access to pensions from age 55,means that rigid pensions are a thing of thepast.

There are a number of changes beingintroduced from April 2015 and, with the rightpreparation, pension planning can be beneficialto you and your beneficiaries.

Pension funds can now offer possibilities to growa fund in a tax free environment, having obtaineda 40% tax deduction on the contributions andbeing taxed at only 20% on withdrawal.

Our in-house Financial Planning department canprovide independent financial advice. If youhave any questions about pensions pleasecontact Gary Cook at Hazlewoods FinancialPlanning on 01242 680 000.

In the last few years there has been significantexpenditure by farming businesses that ispotentially eligible for capital allowances. Therecent high level of the Annual InvestmentAllowance (AIA) for capital allowances hasmeant that a large proportion of theexpenditure can be available as a 100% taxdeduction.

Anaerobic digesters and the expansion ofpoultry businesses have been areas of significantexpenditure. Detailed documentation tosupport expenditure will ensure that capitalallowance claims are maximised.

Anaerobic digestersThe majority of the expenditure in respect ofAnaerobic Digesters (ADs) will be eligible forcapital allowances, including the planning feesincurred. Where a new access road is requiredfor an AD plant to function, it can be possible

to obtain capital allowances on the cost of theroad.

Poultry housingFollowing the abolition of agricultural buildingsallowances, a revenue tax deduction will only beavailable in respect of the cost of poultryhousing through capital allowances. The ‘shell’ ofany building will not be eligible for capitalallowances.

However, it is possible that the same contractorcould be constructing the shell of the buildingas is actually fitting out the building. Therefore,invoices need to confirm which costs relate tothe shell of the building and which costsrepresent expenditure to fit out the building,such as ventilation equipment and electricityand lighting systems. It is much easier to obtainthe necessary detailed analysis for a capitalallowances claim before the building is completed.

Ensure that available capitalallowances are maximised

Agricultural Property ReliefWill a farmhouse claimwithstand scrutiny?In recent years Agricultural Property Relief(APR) claims in relation to farmhouses havereceived greater scrutiny by HM Revenue &Customs (HMRC) with several high-profile taxcases.

Where additional Inheritance Tax (IHT)becomes due as a result of HMRC beingsuccessful in refusing an APR claim, whether inpart or completely, HMRC may also charge apenalty based on the additional tax due. Weare aware of cases where this penalty has beenas high as 30% of the additional tax due.

When making a claim for APR it shouldtherefore be ensured that the claim willwithstand scrutiny by HMRC, and relevantdocumentation such as contract farmingagreements or grazing licences are correctlydrafted and reflect what is actually happening.

Failure to do so could result in a penalty,meaning that the effective rate of IHT is higherthan 40%.

Use of grazing licenses and contract farmingarrangementsMany farmers use grazing licences, share farmingand contract farming arrangements to farmtheir land. One of the main uses of sucharrangements is to protect the farming status ofthe landowner.

Tax advantagesSecuring treatment of the income as farmingincome gives several tax advantages. These willinclude the treatment of the income as earnedincome, allowing the landowner to deductvarious expenses against the income, and toreclaim input VAT. The farm should qualify forcapital gains tax rollover, holdover andentrepreneurs’ relief, and for IHT purposes theowner may still be in agricultural occupation ofthe farmhouse. Business property relief fromIHT should be available for any non-agriculturalvalue from farmland and buildings.

Whether income arising under thesearrangements is treated as rental income fromproperty ownership or a farming trade is oftena grey area. This grey area is being used byHMRC to attack such arrangements and todeny the reliefs mentioned above.

Activities requiredTo qualify for the favourable treatmentattention needs to be paid to the legalagreement and the activities the landownerperforms. As the landowner, to be farming, youmust be in occupation of the land and youroccupation must be for the purposes ofhusbandry. The approach by the courts is todetermine the primary use of the land and thento ascertain the identity of the person who hadthat use. In case law, the courts have beenprepared to accept the landowner as theperson with the primary use provided heconducts some activities which are husbandry.

For example, a grazing license should providethat the landowner is responsible for growingthe crop of grass and actively performs someactivity on the land. This would include mowing,fertilising, seeding, and controlling weeds on theland. Mere acts of maintenance, such as hedgecutting, would not be treated as husbandry.Similar clauses will be required in share farmingand contract farming agreements to ensure thelandowner is responsible for acts of husbandryto protect their farming status.

Business riskIt is also important that there is always somebusiness risk for the landowner. A guaranteedincome every year would not give such risk.Case law has shown that not only is theagreement important but the actions of theparties in performing the agreement is vital.HMRC will put the agreement aside andconsider the facts in each individual case toestablish whether a farming activity is takingplace and it is being carried out by thelandowner.

Going forwardIn essence, if you wish to protect your farmingstatus and you are relying on sucharrangements you should take advice now. Youragreements should be reviewed and therelationship between the landowner and thelicensee, share farmer or contractor should beconsidered to establish the one with theprincipal use of the land and plan for anychanges required now.

VAT on Property Conversionsrepresentations to HMRC from the NationalFarmers Union, that HMRC appeared to haveconceded that they would accept that planningconsent had been obtained in cases where it isno longer necessary to apply for planningpermission! This means that most barnconversions should still qualify for 5% VAT andrepayments of VAT should be claimable under theDIY self-build scheme. However, we understandthat HMRC are still considering various issues,and so have yet to issue definitive guidance.

A further point regarding VAT and planningpermission is to ensure that there are noclauses restricting the separate occupation anddisposal of the property:

� If the property can only be occupied by afamily member or by an employee of a

Ensure full use is made ofannual tax allowances andreliefsThere is still an opportunity for individuals toreview matters and ensure full use is made ofannual tax allowances and reliefs for the year to5 April 2015.

1. Married couples should use bothpersonal allowances and basic ratetax bands

For the year ended 5 April 2015, eachindividual has a tax free personal allowanceof at least £10,000 and a 20% tax band of£31,865. Income between £41,865 and£150,000 is charged to tax at 40%. Wherean individual has taxable income over£100,000 they will lose some or all of theirpersonal allowance, giving an effective taxrate of 60% on income between £100,000and £120,000. Income tax is charged at 45%on income exceeding £150,000.

Possible planning could include varying profitshares in a partnership or ensuring that

Year-end planning dividends paid from a company are paid tothe spouse with the lowest tax rate.

2. Child benefit

Child benefit will be restricted where oneindividual in a household has an income over£50,000. Where possible, income should beequalised between husband and wife and“partners”, to ensure that the child benefitrestriction is minimised.

3. Pension contributions should beconsidered, particularly where taxrelief at 40%, 45% or even 60% isavailable

The rules relating to tax relief on pensioncontributions now allow an individual tocontribute up to 100% of earned income (forexample, salary or partnership profit) subjectto an annual limit of £40,000. However, anyunused relief can be carried forward for upto three years. Pension contributions cantherefore be a useful tool in reducing theamount of income suffering higher rates oftax.

4. Capital Gains Tax annual exemption

Each individual currently has an annualexemption of £11,000, which means that thefirst £11,000 of capital gains is tax free.

Spouses should therefore considertransferring assets to each other beforedisposal to ensure their annual exemptionsare utilised, which could save tax at 28%.

It may also be more tax efficient to crystallisea capital loss in the year before making a capitalgain than in the same year as the gain, as abrought forward loss is only set against gainsafter the annual exemption has been utilised.

The introduction of Permitted DevelopmentRights in England in April 2014 means that itcan be possible to convert agricultural buildingsinto residential dwellings without the need toapply for planning permission. However if theproperty is in a National Park or Area ofOutstanding National Beauty then planningpermission will still be required.

The VAT position on building new residentialproperties and converting commercial buildingsinto residential use has always been extremelycomplicated. The new legislation mentioned abovehas added to the complication and confusion.

A builder carrying out the construction work willhave three choices as to the rate of VAT to charge:

� Zero rate - i.e. 0% - on the construction ofnew dwellings.

� Reduced rate - i.e. 5% - on qualifyingconversions of non-residential dwellings intoresidential use.

� Standard rate - i.e. 20% - on everything else.

One of the key factors in determining which rateof VAT to apply is whether planning permission hasbeen obtained and whether the developmenthas been in accordance with it. The newlegislation led to fears that in the case of a barnconversion VAT would now be charged at 20%rather than the previous 5% because planningpermission had not been obtained.

Clearly this point had not been consideredbefore Permitted Development Rights wereintroduced. It was only in July 2014, after

particular business, or

� The property can never be sold separatelyto another property,

Then the construction work will not qualify foreither zero rating or reduced rating.

In addition, where such planning restrictions exist,VAT incurred on a self-build project will not qualifyfor repayment under the DIY housebuildersscheme. Fortunately an agricultural occupancyclause restricting occupation to someonecurrently or last working in agriculture shouldnot create a VAT problem.

It is crucial that advice is sought at an earlystage to ensure both that the correct rate ofVAT is applied and any VAT recovery by thefarming business is maximised.

Staverton Office:Staverton Court, Staverton, Cheltenham, GL51 0UX Tel: 01242 680000 Fax: 01242 680857

www.hazlewoods.co.ukThis release has been prepared as a guide to topics of current financial business interests.

We strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of the material can be accepted by us.

Hazlewoods LLP is a Limited Liability Partnership registered in England and Wales with number OC311817.

Registered office: Staverton Court, Staverton, Cheltenham, Glos, GL51 0UX. A list of LLP partners is available for inspection at each office.

Hazlewoods LLP is registered to carry on audit work in the UK and Ireland and regulated for a rangeof investment business activities by the institute of Chartered Accountants in England & Wales.

Hazlewoods is a

member of International.

Nick Dee Partnert: 01242 680000

e: nick.dee@hazlewoods.co.uk

Peter Griffiths Tax Directort: 01242 680000

e: peter.griffiths@hazlewoods.co.uk

Nicholas Smail Tax Directort: 01452 634800

e: nicholas.smail@hazlewoods.co.uk

For further information on any of the articles included in this briefing or for general agriculturally related queries please contact: