Agriculture & Rural Business Newsletter
“The ramifications of the recent Brexit vote and the overall impact this will have on the agriculture sector as whole are still unknown. However, we at Henderson Loggie feel this is a good time for those operating in the sector to look at their business and make plans for the future. Our newsletter looks at the issues to consider when passing on the farm to the next generation, and highlights other areas such as the changes to farmer’s averaging from 6 April 2016, and the new personal allowance transfer, which allows some taxpayers to transfer up to 10% of their personal allowance to their spouse”.Sheena Gibson, Head of Agriculture & Rural Business
To discuss any of the issues highlighted within this newsletter, or any other matter you require our help with, please contact your usual Henderson Loggie contact or email email@example.com
Passing on the farm to the next generation
The best succession planning will bring together the plan for the business taking into account the needs of the outgoing individuals and their retirement plans together with the needs of those taking over and structuring the plan as a whole to be as tax efficient as possible while maintaining a profitable and viable business.
The main tax considerations in succession planning are the Capital Gains Tax (CGT) that can be payable on the transfer of assets and the potential Inheritance Tax (IHT) consequences of which there have been many recent changes. So what are the new opportunities and pitfalls in succession planning?
The most important reliefs in succession planning as far as IHT is concerned are Agricultural Property Relief (APR) and Business Property Relief (BPR) which operate to reduce the IHT bill. These reliefs can reduce IHT by up to 100% and they often work together with APR given in priority to BPR. In recent years there has been a significant increase in the number of farms and estates diversifying. This diversification can often jeopardise claims for APR and BPR and there have been many recent cases in the area that can provide useful information for preserving APR and BPR.
The Brander case has shown that it is important to look at the business as a whole as the level of investments held within the business can prevent BPR being available. In this case many factors were looked at including the way the accounts were made up, the split of the labour and management time between trading and non-trading assets and the comparison between trading and non-trading profits. It shows that consistent review of these factors especially in farms and estates with significant let properties can be vital in making sure that BPR is preserved.
The availability of APR is often restricted on farmhouses where they are considered not to be of the character appropriate to the farm. Where this is the case the new residential nil rate band can be an additional relief available for the reduction of IHT. The residential nil rate band comes into effect from 6 April 2017 and is restricted for estates valued at over £2 million.
An important part of succession planning often involves passing assets on during lifetime to the next generation. There have been changes to the rules on Capital Gains Tax around Entrepreneurs Relief which means there are greater opportunities for claiming relief when assets are passed on to the next generation. The Finance Act 2015 withdrew relief on certain associated disposals including where assets were held personally but used by a partnership which is often the case in farming. New rules mean that this restriction will only apply where there are arrangements that take effect after the qualifying disposal which means the relief is now available in many cases.
When Single Farm Payments (SFP) became worthless on the introduction of the basic payment system in December 2014, farmers who had purchased or inherited SFP generated a capital loss. This should have been claimed in the 2014/15 tax return so if this has not yet been done, there is still time to go back and amend this. These losses are then available to offset against any CGT available on the transfer of assets.
Significant changes to pensions in recent budgets and their interaction with IHT planning now mean that pensions can be used as a tool as part of the succession plan to help protect assets from Inheritance Tax. Where there are assets that might not qualify for full APR (where the agricultural value is below the market value) or for full BPR (some assets only qualify for 50% relief from BPR), where these are commercial and not classed as residential property, they can be purchased by the pension fund. Assets in the pension fund increase in value and remain outside the scope of IHT and any income produced is free from Income Tax while it accumulates within the pension fund. There are CGT implications that need to be considered when putting assets into a pension fund as not all assets will be eligible.
These are some of the most important considerations and the most recent changes that should be considered as part of succession planning. This should be done as an ongoing process looking at the business as a whole, involving all parties and considering the IHT, CGT and income tax implications. By working together with your advisors a succession plan can be put in place that can adapt to both to the changes in tax law and the changing requirements of your business.
For any enquiries please contact firstname.lastname@example.org
Annual Investment Allowance
The Annual Investment Allowance is available for purchases of most plant and machinery and reduces the taxable profits on plant purchased, subject to an annual limit.
The rate was £500,000 for expenditure incurred from April 2014 to 31 December 2015 and reduced to £200,000 from 1 January 2016.
The rate is apportioned based on the accounting year end.
From 6 April 2016, an option to average profits over 5 years has been introduced. The existing rules for averaging over 2 years remain.
The first year 5-year averaging is available will be from 2016/17 onwards and we would need to consider the profits for the previous four tax years to determine if 5-year averaging is available. Marginal relief, which was available where profits of one year were between 70% and 75% of the profits of the other year, was removed from 6 April 2016 and the rules for 2-year averaging are now such that they are available when the profits of one year are 75% or less than the profits of the other year.
Averaging continues to be unavailable to companies.
No more tax returns!
The current Government plans to abolish the tax return by 2020. What does this mean for the average farmer? It appears that there will still be an onus to provide HMRC with information regarding accounts. The last minute rush of the 31 January deadline may become a thing of the past and, instead, the information will be fed to HMRC via an online account, which can be managed by your agent on your behalf, on a more regular basis. One advantage appears to be that the lump sum payments in January and July could become a thing of the past and taxpayers will have the option of a pay-as-you-go system. For farmers, with the introduction of 5-year averaging, loss reliefs available and fluctuating profits, this may not be as simple a process as it would seem.
HMRC are currently implementing digital accounts for small UK businesses and a large number of individuals should have access to their new online account. The linking of accounting software packages with the online accounts is due for implementation a bit further down the line.
Personal Allowance Transfer
From 6 April 2015, some taxpayers can transfer up to 10% of their personal allowance to their spouse. The criteria are that the spouse receiving the allowance must be a basic rate taxpayer and the spouse transferring must have income less than the personal allowance. The transfer is not available for those born before 6 April 1935 and claiming married couples’ allowance.
The tax saving for the tax year 2015/16 would be £212 (20% of £1,060) and should be claimed through the tax return or PAYE tax coding notices.
Corporate Partners and Dividends
If you have a corporate partner within the farming partnership with distributable reserves, you should be mindful of the new dividend rules.
From 6 April 2016, the 10% tax credit was abolished meaning dividends are now paid without the 10% tax credit. At the same time, a dividend allowance of £5,000 was introduced and the tax rate for dividends was increased to 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band.
Previously, the 10% tax credit on the dividends covered the tax due within the basic rate band. This is no longer the case and if dividends are paid to shareholders, the first £5,000 will be tax free but anything over that will be subject to tax at the above rates.
Changes to the Corporate Partner Model
A mixed partnership is one with both individual and non-individual partners, such as companies, trusts or Limited Liability Partnerships. The draft law has now been included in Finance Bill 2014, which was enacted July 2014 and is effective for periods of account beginning on or after 6 April 2014. Periods straddling that date will be split in two.
Where in the past it was possible to allocate a significant share of partnership profit to the corporate partner, with the introduction of the Finance Bill 2014, where a corporate partner is still to receive a share of profit it will be necessary for the partnership to justify why that share of profit is being received. This will be done by identifying the services that the corporate partner has provided to the partnership during the accounting year, in return for its profit share. Services can be the provision of people who are employed by the corporate partner to work in the partnership, or charges for the use of equipment and the rent of land, which is owned by the corporate partner. Alternatively, the share of profit can be the effective interest charge for the year on the capital contributed to the partnership by the corporate partner, but it will be important to ensure that this is at a commercial rate of interest. The capital contributed could well just be the undrawn profits from previous years.
If it is not possible to justify the share of profit received by the corporate partner as a charge for services, or a return on capital, then HM Revenue & Customs will direct that the corporate partner’s share of profit should be allocated to the remaining partners, thereby increasing their income tax liability for the year. There will undoubtedly be cases where this can be disputed, based on special factors involved on a case by case basis.
Where there is a good case to justify the share of profit allocated to the corporate partner, it will be possible to carry on as before. In cases where profit share allocation is not so easy to justify, it may be advisable to allocate a smaller share of the profits to the corporate partner, perhaps limited to a commercial rate of return on the capital contained in the company. Alternatively, either staff or equipment can be transferred to the company, and the corporate partner can then make charge to the farming partnership for these services.
Alternatively, it may make more sense to cease allocating profit to the corporate partner, if it is felt that it would be difficult to justify a share of profit to it under the new rules. There are two ways this can be done. The limited company can retire from the partnership, but remain in place as a dormant company. In future years, if the taxable income from the partnership is particularly small in one year then dividends can be drawn out of the company to provide income. The downside of keeping the company going is that you lose the ability to claim entrepreneur’s relief after three years of it retiring as a partner.
Alternatively, the company can be placed in Members’ Voluntary Liquidation and wound up. Provided the company is a trading company, the shareholders are also directors of the company, and each shareholder holds in excess of 5% of the company, then the individual shareholders will benefit from Entrepreneur’s Relief and in most cases will pay capital gains tax at an effective rate of10%. Under this method, there will be an additional cost where the reserves of the company are in excess of £25,000, as a Members’ Voluntary Liquidation can only be carried out by a licenced Insolvency Practitioner. It should be possible to contend that the company is trading based on it being an active partner in the business, but this could be challenged by HM Revenue & Customs. We are expecting a number of cases to go through this process shortly, which will give us a good indication of the Revenues attitude.
There is an option to incorporate the whole of the farm into the limited company. There are other issues to be considered should this alternative be considered, and we would recommend that this be fully discussed with your professional adviser before taking this step.
The new Common Agriculture Policy
Whilst the Scottish Government have continued to payout first instalments under the new Common Agriculture Policy, there are still a number of eligible farmers and crofters who have not yet received a payment, and for many this will put a continued strain on cash flow. It is imperative that the farming community works with its business advisers and bankers, to ensure facilities are in place to deal with this issue.
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