Rural Intelligence
for
Farms & Estates SUMMER 2021
Introduction The agricultural environment is hotting up this summer in more ways than one. The weather is conducive to high yielding crops with prices also reasonably high. Other changes are also beginning to impact. We are now in the first year of a reduction in basic payment with deductions of between 5% and 25% reducing everyone’s December payments. This is starting to focus farmer’s minds on what the future holds. In my mind there are three main philosophies that farmers are considering pursuing. There are those who will be severely impacted by the demise of the basic payment, who are seeking to replace this with environmental payments by entering whole farms into stewardship schemes. This is almost always at the expense of food production, however the aim is that payments for public good are the best way forward for their family and business. Others are gearing their food production towards being able to farm without subsidies. In particular, poultry, pig and dairy farms are best placed to produce food without Government payments. This is something that we look at with farmers when reviewing farm accounts with our clients. Finally, there is a middle road which involves dividing up a farm into productive areas and non-productive. Food production will continue on the most productive land with public money used to enhance the environment where land and buildings are not efficient. More intense food production is then focused on the areas of the farm that can produce food efficiently. There are many ideas out there for earning additional income. Looking around at what is possible and keeping an open mind as a business owner is key to developing your farming business. Being willing to try something different even if it feels experimental will also help. I hope you enjoy our newsletter.
Iain McVicar Partner and Head of Farms & Estates, Albert Goodman
PAYING OUT A NON-FARMING FAMILY MEMBER as part of the SUCCESSION PLAN Over the past couple of years, we have seen a few high profile cases on probate disputes regarding the splitting of assets on death. Sometimes the cause for the case is the family trying to treat all family members equally. This is done by the business assets being split between both the farming and non-farming members of the family. This has often resulted in the farming members of the family feeling hard done by and the business future being put at risk. It is therefore important to consider alternative options for treating your family fairly. This is often done by paying cash sums to the non-farming members of the family. There are two common methods:
1
A LOAN FROM THE BANK TO PAY OUT CASH WITH THE BUSINESS REPAYING THE FUNDS OVER A PERIOD.
2
TAKING OUT LIFE INSURANCE WHICH WILL PAY OUT A CASH LUMP SUM ON DEATH.
If we consider a practical example, Mr Jones aged 50 has a small farm, his first child is active in the business. Mr Jones would like the first child to have the farm on his death. His second child is not interested in farming and is employed and lives away from the farm. Mr Jones would like to leave the farm to his first child and give his second child a cash sum of £400,000 which he thinks is fair as his first child has given their life to the farm and the other has made a different way in life. So, if we consider the options: Assuming the business has sufficient serviceability, the farm business, passing to the first child, could take a bank loan of £400,000 repayable over 25 years and use the funds to pay out the sibling.
1
This loan at an interest rate of 4% would cost approximately £2,110 a month and in total would cost the first child just over £663,000.
In this option Mr Jones would take out a whole of life insurance policy for the total value of £400,000. Assuming Mr Jones is healthy and a non-smoker then the cost per month would approximately be £524 a month for the rest of his life.
2
If we then assume Mr Jones lives until age 90, then the total cost of the policy to death would be £251,250. As we can clearly see the total cost of the life insurance policy is cheaper than the total cost of borrowing the money. The cost of the cash sum is also borne by Mr Jones rather than the first child, which means when the first child receives the farm, they are free to continue the business as they wish without having to repay the additional debt. It is clear to see both the financial and commercial benefits of using a life insurance policy to repay the cash sum needed. For farming families, it is therefore important to consider how they can fairly split their wealth amongst their family early on. Planning early and communicating this to the whole family can prevent disagreements in the future.
Tom Stone Farms & Estates Team tom.stone@albertgoodman.co.uk
second report
THE OTS ON CGT Capital gains tax (CGT) is the tax paid on gains realised on the sale of assets such as land, buildings, dwellings, shares and other property. The rates of CGT are low compared to personal income tax rates with CGT rates on residential property 18% to 28% and all other property at 10% to 20%. In July 2020, against the backdrop of Covid-19, and unpresented government support, Rishi Sunak asked the Office of Tax Simplification (OTS) to review CGT. They published their first report in November 2020 (see winter newsletter article - Recommended changes to Capital Gains Tax | Albert Goodman). On 20 May they released their second report. The second report focuses on practical, technical and administrative issues and it covered a range of areas including getting divorced, main homes and running and investing in business. However, there was particular focus on land transactions. What was striking to me was the impact of lobbying by The CLA with many of the matters delivered by them to the OTS noted in their report. The CLA is the only named organisation in the report with reference to the CLAs recommendation for delivery of the ‘Rural Business Unit’. The main recommendations affecting landowners are:
1. The treatment of land used in a trade v land treated as investment The report noted that land used in a trading business (farming) is often treated more favourably for tax purposes than land held for investment purposes (let land and property). The report recognised the existing system has implications for modern farming businesses which are diversifying to maximise business opportunities. By diversifying, farming businesses jeopardise important CGT and IHT reliefs which are especially important to the sector to support longer term business investment, restructuring and succession. The report went on to say ‘Some representatives of such farming businesses have been consistently arguing that the tax system should be modernised to help farmers to address these and other diversification issues. One suggested approach to such modernisation is presented by the Country Land & Business Association in their single ‘Rural Business Unit’. The OTS made no specific recommendation on this although this is a step forward and they did recommend government consider how certain tax rules interact with policy aims.
2. Land use
The OTS made the following recommendations:
The report referred to changes in land use such as those that may take place on entering Environmental Land Management schemes. It noted that these land use changes could jeopardise CGT reliefs.
Government should expand the rollover relief rules to free up owners of agricultural land to reinvest in more economically efficient improvements to or construction of buildings or to allow wider diversification investment.
The OTS recommended government review certain tax rules against environmental objectives to ensure they do not create different incentives and to coordinate effectively so that there are no unnecessary barriers to wider environmental policy aims.
Legislation should be expanded to allow the gain arising on the receipt of a compensation payment for the devaluing of land near to the compulsory purchase area to be rolled over.
3. Deferred proceeds
The rollover time limit should be expanded to say five years.
Proceeds from the sale of property can be received in different ways and sometimes they might be paid over several years. This often creates practical issues including upfront tax on cash that has not yet been received. This can distort commercial decision making.
HMRC guidance on the ‘willingness to sell’ point should be clarified to give more certainty to owners of farmland in compulsory purchase situations. Or the point should be removed.
The report recommends considering tax liabilities being due at the time the cash is received and preserving eligibility to reliefs at the time of sale. This would be hugely simpler for landowners selling, particularly development land.
4. Compulsory purchase and rollover relief Owners of let land are not normally eligible to claim rollover relief on its sale. However, there are rules to allow the relief when land is compulsory purchased, assuming the land is replaced on a like for like basis – the gain on the sale of let land can then be rolled over but only into new land, not into new buildings on land already owned. The relief rules specify that the relief will not be given in compulsory purchase situations where the landowner has shown a ‘willingness to sell’ in advance of the order. This causes issues with landowners concerned about entering early negotiations with a purchasing authority because they may jeopardise their relief. Compensation is also often received for blight to neighbouring land by a development. As land has not been disposed the compulsory purchase legislation cannot be applied and it will not qualify for rollover relief. The OTS noted the challenges for owners of farmland particularly since acquiring replacement neighbouring land can be difficult in the current land market. Further requiring a like for like basis has little economic rational - the farming sector would benefit as much from new agricultural buildings on land already owned.
5. Land pooling Often multiple landowners are involved in the assembly of land for development purposes. One way of assembling land is by land pooling. This involves the collaboration of landowners to provide a suitable area for development. The landowners then share in the proceeds of the sale of the pooled land. However, there are many CGT and stamp duty land tax issues of land pooling. As a result, it can be complex and expensive to put structures in place to avoid unnecessary tax charges. This leads to delays in bringing land forward for housing. The OTS recommended that government should explore ways to make land assembly more tax neutral. Overall, the second report has made some very positive recommendations for the farming and landowning sector. Immediate clarity is required regarding point 2 and we will wait in anticipation to see if point 1 is taken forward. The latter would hugely simplify the taxation of farms and estates providing transparency in planning for the future. The chancellor is required by the OTS legislation to respond to reports he has commissioned. Typically, responses are given in Budgets with the next one due in the autumn.
Sam Kirkham Farms & Estates Team sam.kirkham@albertgoodman.co.uk
THE IMPACT OF CORONAVIRUS ON borrowing money for your business The events of the past 16 months have had massive adverse effects on the UK economy. Within agriculture the effect of both Brexit and Coronavirus have not yet been felt. After an initial period of short term demand and price reductions across most sectors in spring 2020, we have seen most sectors bounce back and certainly livestock prices seem as good a recent memory can remember. However, across the UK most other industries have been adversely impacted and largely propped up by government secured loans, the furlough scheme and business rates grants/reductions. As a result of this unforeseen change and government secured borrowing, most banks have seen a swift change in the risk profile of their lending book. Though agriculture is viewed as a low risk sector, given the security available, it is important to remember that agriculture is a small part of this “lending book”. Therefore, though we may view the risk profile of agriculture as low, it is certainly going to be harder to obtain the “green tick” for new lending and you may have to pay a higher rate of interest for the privilege - we have seen this already in the form of banks increasing their margins.
In the past few months of presenting lending proposals and helping clients to obtain lending, it has been clear to me that the appetite for projection led lending is low. This means that for new businesses or businesses looking to change their operations significantly that lending is going to be harder to achieve. It is therefore important when presenting the proposal to the bank, you consider the sensitivity of your proposal and that you or your advisers explains the history of your business clearly illustrating how you have successfully managed change in the past or your businesses success. In summary, the right proposal will still get the borrowing it requires, but two things seem more certain over the next couple of years; the cost of borrowing will be higher, and projection led lending will be much harder to get through than two years ago.
Tom Stone Farms & Estates Team tom.stone@albertgoodman.co.uk
Changes to the VAT Agricultural Flat Rate Scheme from 1 January 2021 The VAT Agricultural Flat Rate Scheme is an alternative to VAT registration for businesses undertaking “Farming Activities”. This includes crop production, stock farming and forestry. To use the scheme businesses have to meet certain eligibility conditions and also have to be approved by HMRC. From 1 January 2021 HMRC have made two changes that significantly restrict the scope of the AFRS.
LINKS AND ASSOCIATIONS In addition to the turnover restrictions farmers are no longer able to use the scheme if they are, or have been in the last 24 months: eligible to register for VAT in the name of a VAT group, or registered for VAT in the name of a division, or
ENTRY AND EXIT THRESHOLDS
associated with another person.
With effect from 1 January 2021 thresholds have been introduced for joining and leaving the scheme.
A person is associated with another person if the business of one is under the dominant influence of the other, or they are closely bound to one another by financial, economic and organisational links.
In order to join the scheme turnover from farming activities, in the year ending with the date of the application, must not exceed £150,000 Farmers on the scheme will have to leave if annual turnover from farming activities is over £230,000 or if turnover from farming income in the last 30 days exceeds this value Annual turnover should be reviewed on the anniversary of joining the scheme while the 30 day test is applied on a rolling basis.
WHAT DOES THIS MEAN FOR FARMERS? The greatest impact of these changes is likely to be for Farmers who are currently using the scheme who will have to check and monitor whether they remain eligible to use the scheme. Where a farmer ceases to be eligible they should notify HMRC within 30 days of the relevant event. For example the anniversary of joining the scheme if the annual threshold is exceeded or the date of becoming associated with another person.
SELLING YOUR SOLAR PARK After years of green incentives, there are numerous solar parks dotted around the country. While this has been great for landowners and the climate it has led on to organisations wishing to buy solar parks, or the tenants wishing to purchase the freehold of the solar park, to benefit from the same rents. Farmers are often told, usually by the potential purchaser, that, as the land has been farmed, you can rollover the gain into new farmland. However, this is not the case, as, for this relief to apply, the land must be farmed at the point of sale. Selling a solar park can be expensive - a solar park which is rented out is an investment asset so there is very little relief from capital gains tax. Further gains can be significant, as often farmland has been in the family for numerous years and any base cost would be insignificant compared to the value today. If we were to take a 100-acre solar park with a rent of £1,000 an acre, if the rent is indexed linked to inflation, the value of the land might be the rent multiplied by the number of years remaining, and then discounted. For example, if we have 25-years left of a 30-year lease, the value might be approximately £2.5million. If this land had been farmed since 1982 by the same people, then the base cost might be approximately £125,000. Even if it were bought more recently, when farmland was £10,000 an acre, the base cost is only £1million. Therefore, there is going to be a substantial gain on the sale of the land. With a 1982 base cost there would be a gain of £2.375million. Without rollover relief the capital gains tax (CGT), whilst still only 20%, would be £475,000, this could be cheaper than retaining the land. If the value of the land is effectively the sum of the rent you will receive, depending on you other income, you could
pay more tax in the form of income tax by retaining the land. Assuming the land is partnership property with three partners, with the farm making £100,000 profit each year. With the addition of the rent from the solar park, the three partners would have some higher rate tax to pay. Especially with the rents being indexed linked and with the basic rate bands being frozen for the next five years, this could lead to more income tax being paid. With the level of income mentioned above, half of the rent is being taxed at 40% with half at 20%. The total income tax each year would be £30,000, of the remaining life of the lease that is £750,000 of income tax. In any decision to sell land, you would have to remember that you would no longer own the underlying land, however, the upfront cash now and the potential for the overall tax to be lower could be a real incentive to sell the solar park. Further, HMRC have been under pressure to reform CGT and the rates of tax to bring the rates in line with that of income tax. If this were to happen, then the CGT on the sale would increase from £475,000 to over £1million, depending on your other income. While there could be a possibility to sell a solar park with no tax payable, this would require certain circumstances to be applicable where the rent is received in a trading business, which is then incorporated. If the funds are then needed personally instead of for the business, this option would not work and lead to a higher tax liability. If you have been contacted about the sale of your solar park and want some advice regarding the CGT liabilities, please do get in touch.
Andrew Withers Farms & Estates Team andrew.withers@albertgoodman.co.uk
Regenerative farming There is nothing new about regenerative farming, but it has become a hot topic recently. The farming policy revolves around soil health, which helps maintain outputs whilst using less inputs. This has provoked a lot of conversation, especially in connection with the combination of maximising carbon capture in the soil and ensuring there is enough food to feed the growing population. Water retention, erosion and compaction are several issues effecting soil quality. These all have a direct link to the productivity and hence profitability of land, whatever type of farm you run. With direct subsidies for land being phased out farmers need to look at how they maximise their returns from the land that they farm. Several different farming methods have been discussed in the past, including ecological, biodynamic and sustainable farming. The traditional mixed farming is a way that would fit into the regenerative farming method. Crop rotations are being lengthened to try and improve organic matter in the soil to hold as much carbon as possible. Increased organic matter in soils, either from grazing or incorporating farmyard manure should help to reduce the need for artificial fertilisers, whilst maintaining outputs and profitability. Winter cover crops are used to reduce soil erosion and the crops help maintain carbon in the soil but sprays, mainly glyphosates are needed to kill off the cover crops in the spring, which is a downside. Minimum tillage (min till) for farmers has long been a method used to minimise establishment costs and avoiding disturbing the soil structure, if compaction and weed control is not an issue. Soils types and the increasing resistance of weeds to sprays has meant this is not always a viable farming option.
As part of the crop rotation livestock can be a useful way of controlling weeds and help to naturally fertilise the land. Collaboration between farmers can facilitate this process by helping different farms in the same area to work together to be more productive and reduce costs, without sacrificing outputs. As an example, an arable farmer could work with the local sheep farmer and graze the winter cover crops, which will aid the natural fertilization and reduce the use of sprays to kill off the cover crops when the spring crops are planted. Labour could also be shared, as busy periods are at different times of the year, such as harvest and lambing. This could prevent the need for extra staff needing to be employed and keep costs down. There have been several studies undertaken on the potential costs saved through regenerative farming. Some figures show that reductions in fertiliser, establishment costs, including fuel, could be over £150 / ha. If wheat was £150 / tonne then assuming the yield is not reduced, or for a 10 t/ha crop of wheat the reduction is not more than 10% the gross margin would be better. There would also be cashflow savings by not needing to buy so much fertiliser and fuel earlier in the year. Whilst there is no one solution to how food is produced efficiently and profitably, different methods of farming, including regenerative, should be considered to ensure that your farming business thrives in the future.
James Bryant Farms & Estates Team james.bryant@albertgoodman.co.uk
TAXATION OF HOUSING FOR CERTAIN FARMWORKERS Accommodation provided to farm employees (except for company directors/shareholders) has historically been treated typically as a tax-free benefit. This is based on over 40-year-old legislation which allows exemption because the accommodation is either necessary for them to do their job or it is customary to be provided with accommodation. For some workers the tax-free status has been reliant on a long standing Extra Statutory Concession (ESC) for Representative Occupiers. HMRC announced this ESC would be removed from 1 April 2021. Despite lobbying the ESC has been removed and this could result in tax and national insurance charges going forward. Therefore, landowners should review the status of their accommodation provided to current and retired workers.
Agricultural workers and retired agricultural workers and their widows The statutory exemption remains in place where accommodation is provided for the proper performance of the employee’s duties. This would apply to most agricultural workers, and retired agricultural workers and their widows, required to live on the farm or estate. However, to protect the exemption it is important the contract of employment reflects they must live in the accommodation to perform their duties.
Non-agricultural workers and retired non-agricultural workers For those who relied on the concession (posts, and successors to those posts, in place before 6 April 1977 where it was a requirement to live in the property as a condition of their employment) it will be necessary to consider whether they continue to qualify for a tax-free benefit under the statutory exemption. For this to apply the living accommodation must either be: Necessary for the proper performance of duties; Customarily provided for the better performance of duties; or
Required for personal security of the employee. HMRC have agreed that many farmworkers should be covered by the ‘necessary’ exemption but there could be issues for other positions, particularly if it is not customary for accommodation to be provided for the type of position. To be customary, it must be normal practice, with more than half the employees of that class being provided with accommodation. The type of employee who could be affected by the removal of the ESC would therefore be gamekeepers, property maintenance staff, on-call estate workers, gardeners, chefs, resident agents or farm managers. For these employees to continue to be covered by the statutory exemption there will need to be good evidence that the accommodation does enable the proper performance of duties, or better performance is reliant on the provision of the accommodation.
Conclusion All employers should review their accommodation use and consider whether any employee or retired employee provided accommodation will continue to be tax free. The removal of the ESC leaves many employers with huge uncertainty on whether their employees will continue to be exempt. The statutory exemption is very out of date and does not reflect changes in the workplace, particularly for farms and estates who have diversified. The CLA and other bodies are continuing to lobby and provide Treasury with examples of the unintended economic consequences for rural businesses and the community. The impact on retired employees of a potential tax charge and pressure on farms and estates to raise salaries for workers to pay for the tax due will be damaging on rural business and communities, putting jobs at risk and more pressure on the need for affordable housing.
Sam Kirkham Farms & Estates Team sam.kirkham@albertgoodman.co.uk
ARE YOUR AFFAIRS Wills Our recent survey undertaken by RAG UK, a national affiliation of agricultural accountants who deal with more than 5,000 farm businesses meeting regularly to share ideas, shows that 43% of farmers have an outof-date Will or no Will at all. Unfortunately, it is one of the very few known facts – one day we will all pass away and as Jeremy Clarkson reminded us, farming is still one of the most dangerous professions in the UK. Given the certainty, why is it that almost half still need to address it? Often it is considered too hard or a cost that is not essential in this year’s budget. However, as well as considering your assets a Will defines who you wish to look after your children and, as a new mum, this is something that certainly made me sit up and think! In relation to your assets, dying without a Will (intestate) means that the rules of intestacy kick in. The first £270,000 goes to the surviving spouse, if there is one, with the remainder of the estate being split 50% to that surviving spouse and 50% equally split between the children. We should note that estranged children have the same right, but stepchildren do not. Should you pass away without any surviving family such as children, parents/grandparents, aunts, and uncles etc, and without a Will, then the Crown will take your entire estate. In short, should you pass away without a Will your hard-earned assets could end up with someone you did not intend.
Lasting power of attorney Whilst we are on ‘awkward’ subjects – almost the same number of farmers also did not have an up-todate lasting power of attorney (LPA). Of the farmers who completed the survey 41% said they needed to do one or update the one they had. Should you no longer be able to, a LPA enables someone to make decisions for you or help you to make them. By the time you require a LPA it is often too late to get one, but having one can help safeguard the running and future of a farming business. Due to our role, as accountants, we focus on the property and financial affairs LPA but there is also a health and welfare one. Although normally associated with old age, an LPA can prove invaluable in the case of a sudden accident where, with an LPA, the attorneys can step in to run the bank account, pay staff etc. It should go without saying that you should implicitly trust the attorney you appoint. Should you be appointed as someone else’s attorney you appreciate the responsibility that comes along with the role. It is recommended to have a mix of individuals – you can have up to four attorneys. When it comes later life planning we benefit from working with my fellow Partner, Louise Osbourne who is accredited by the Society for Later Life Advisers (SOLLA) and specialises in financial, tax and investment planning strategies for retired clients or their Attorneys and planning for the cost of long-term care. Louise also volunteers as a Dementia Friends Champion for the Alzheimer’s Society.
in order? Partnership or shareholders agreements Finally, another legal document that can be incredibly valuable is a partnership or shareholders agreement. It was pleasing to see 56% said that they had an up to date partnership or shareholders agreement. Although pleasing, 44% do not have such an agreement and it was also a little surprising when only 26% confirmed that they have succession plans successfully in place. Drawing up a partnership agreement can be a positive exercise ensuring that everyone knows and agrees where they stand. Without a partnership agreement should a new partner wish to be appointed or a partner die or retire, the matter would all be settled under the provisions of the Partnership Act 1890. This may lead to an unexpected or unwanted outcome. Under the act, the death of a partner means the partnership has been dissolved by law, despite there being other surviving partners. This alone can cause complications, particularly with the bank, many of whom encourage farming families to have partnership agreements to prevent bank accounts being frozen on the death of a partner – the last thing you would need in that position. Understanding what is partnership property is often a much bigger question than you may think. It is critical that your financial accounts and partnership agreement agree on the ownership of
assets. Given the value of farmland and property today and the number of court cases that have appeared over the years it is critical that this is agreed and consistently shown throughout the documents. Any partnership assets will be dealt with as part of the partnership, and therefore may not even be included in your estate as an individual asset to be passed down as your wish. Whether an asset is partnership property also has significant implications for inheritance tax and the possibility of claiming 100% business property relief. Finally, in some circumstances the trading profits of a business may vary year on year, as agreed by the partners, but this can sometimes have unintended implications on the ownership of the assets if not properly considered and documented. Finally, a partnership agreement will state on the basis on which a partner could be ‘bought out’, the valuation basis and the timing of the payment. There is a large valuation difference between someone being paid out on the ‘book value’, as shown in the accounts, or someone being paid out at open market value. For some they will say it is an optional cost and one which could be postponed for another year. However, I would have to ask if you can afford not to have your affairs in order. The past 18 months will have demonstrated that even the most unexpected events can occur and sadly there have been some local farming accidents reminding us all how real these events can be.
Organising your affairs in advance is far more cost effective than having to after you are no longer capable of doing so. We do not draw up legal documents ourselves but we are always happy to have the initial discussions with you and work closely with your solicitor to ensure the necessary legal documentation includes relevant provisions and fit with the family’s aims and objectives. Wills, LPAs and partnership/shareholders agreements can quickly become outdated, and it is vital that you review them regularly. Should you have any concerns or wish to discuss your situation then please do give us a call.
Kate Bell Farms & Estates Team kate.bell@albertgoodman.co.uk
MAKING TAX DIGITAL Making tax digital (MTD) has been around for certain businesses now for a few years. HM Revenue and Customs have set out the timeframe for all businesses, self-employed people and those with rental income over £10,000 to join. For VAT periods starting on or after 1 April 2022 all VAT registered businesses will need to submit their VAT returns under MTD. Up until then only VAT registered businesses with a turnover of more than £85,000, the VAT registration threshold, have had to submit their VAT returns in a MTD compliant way. There will be farming businesses who are VAT registered, because of their sales being zero rated, which will need to change the way they submit their VAT returns from this date. Logging onto the HMRC website to manually type in your VAT return figures will not be acceptable anymore. There are several different solutions to submitting your MTD VAT returns in future. These include using software which is MTD compliant, such as Xero and Quickbooks or using one of the bridging software solutions which can link your spreadsheet, for example, to a MTD compliant way of submission. Either way you will need to ensure you have decided what is best for you by the time your first VAT return, starting on or after April 2022, is needed to be submitted. Registering your business for MTD with HMRC doesn’t happen immediately so don’t leave it to the last minute. If you are self-employed but are not VAT registered or are a landlord, with rental income of over £10,000 per year, you will also have to comply with the MTD rules for accounting periods starting on or after 6 April 2023. The final sector to have to comply with MTD will be any company, which is dealt with under corporation tax. HMRC have said that they will not mandate these businesses joining the scheme before 2026. Although some of these start dates seem along way into the future, we suggest you start discussing them with us sooner rather than later. We can help you decide what you need and can do yourself, what you wish us to do and together we can make the transition as smooth and painless as possible.
James Bryant Farms & Estates Team james.bryant@albertgoodman.co.uk
Trade opinion and agricultural transition tips With British farming feeling on the very edge of one of the most crucial transitional periods, how can a farming business prepare for such uncertainty and volatility of farm gate prices?
The process of gathering international trade deals has begun, a deal with Australia. This has spurred reaction of the reality for both farmers and consumers in a free trade country. Although I don’t agree with everything he says, Jeremy Clarkson’s recent article in The Times on animal welfare and foreign trade agreements has summarised industry concerns, whilst maintaining his trademark mannerisms. A deal with Australia that allows lower welfare meat to be sold alongside British meat in supermarkets has been labelled as ‘paving the way for poor welfare trade deals.’ The World Animal Protection Organisation ranked the United Kingdom 4th and Australia 10th in the list of countries with the highest animal welfare standards. Future import deals with countries such as Canada, 20th on the list pose obvious concerns. A 15-year quota with Australia for beef, lamb, dairy, and sugar has been agreed, to prevent a sudden influx of potentially cheaper produce flooding our shelves. Other concerns are that, due to transportation costs, prime cuts are those most likely to be imported, creating a national carcase imbalance. With uncertainty of farm gate prices due to international trade prospects, teamed with the reform of the subsidy system, here are 5 tips that could help your business ‘weather the storm’: Cash is king. An old favourite but cash can act as a buffer to allow a degree of comfort with fluctuating prices. Reducing borrowing cash outlay. Potentially utilising fixed-rate interest to reduce interest rate exposure or lengthening loan terms. Selling outlying land/machinery to reduce borrowing and HP. Machinery replacement/property repairs. Consider delaying large capital expenses if possible until the outlook is clearer. Diversification. Investing in non-farming enterprises to spread risk. Payment plans. Make use of payment plans for inputs such as fertiliser, seed and sprays to ease cash-flow. Although generally the industry is showing concerns for poor quality of imports, I believe that farmers should try to remain optimistic in the opportunities that a global export market can offer. Focusing on how we can market our fantastic welfare and quality.
James Reader Farms & Estates Team james.reader@albertgoodman.co.uk
FARMING IN
protected landscapes Defra have recently released details of a new Farming in Protected Landscapes programme. This is part of the Agricultural Transition Plan which set out the phased removal of Direct Payments.
Climate More carbon being stored and sequestered through increasing woodland cover.
The programme will offer funding to farmers and land managers in Areas of Outstanding Natural Beauty, National Parks and the Broads.
Re-wilding an area of land and promoting natural processes.
It will run from July 2021 to March 2024 and will fund projects that:
Nature
Support nature recovery.
Creating ponds to support a greater variety of wildlife.
Mitigate the impacts of climate change. Provide opportunities for people to discover, enjoy and understand the landscape and its cultural heritage. Support nature-friendly, businesses.
sustainable
farm
The Farming in Protected Landscapes programme has been developed by Defra with the support of Area of Outstanding Natural Beauty (AONB) and National Park staff from across England. Projects must provide value for money and result in at least one climate, nature, people or place outcome, for example:
Restoring field boundaries to better manage existing habitats for biodiversity.
People Creating and promoting a series of farm walks across a cluster of farms giving more opportunities for people to explore, enjoy and understand the landscape. Replacing stiles with gates on public footpaths for easier access giving more opportunities for diverse audiences to access the landscape.
Place Historic structures and features being conserved and enhanced to reinforce the quality and character of the landscape. A locally branded food initiative that promotes the links between the product and the landscape in which it is produced. Projects must also support the priorities of the relevant protected landscape body’s management plan. The programme will work alongside Defra’s existing and new schemes to add value where it’s most needed. Funding can still be obtained if land is in an agri-environment scheme as long as the same work is not paid for twice. If a project is the same as a Countryside Stewardship activity, the grant would be the same as the Countryside Stewardship rate. If a project is not the same as a Countryside Stewardship activity, the protected landscape team will offer funding on the estimated costs. Applications for the first year of programme funding should be made between 1 July 2021 and 31 January 2022. Projects over £5,000 will be judged by a local assessment panel who will be making funding decisions every 6 to 8 weeks. Applications for less than £5,000 will be scored by a senior member of the relevant protected landscape body. Further details can be found at www.gov.uk/guidance/funding-for-farmers-in-protected-landscapes
Jenny Batchelor Farms & Estates Team jenny.batchelor@albertgoodman.co.uk
Roll with it With the reduction in the lifetime limit for Business Asset Disposal Relief (formerly Entrepreneurs Relief) from £10m to £1m since 11 March 2020, rollover relief is becoming an increasingly useful tool for farmers to defer tax.
So, who qualifies for rollover relief?
Rollover relief enables a gain on the disposal of business assets used in a trade to be deferred where the sale proceeds are used to invest in new business assets. Therefore, capital gains tax (CGT) will only be due when the new asset is sold. Based on the current rules, if the asset is retained until death the CGT liability effectively disappears.
Commercial woodlands.
The replacement assets would need to be acquired within the period 12 months before and 3 years after the disposal of the old assets, although HMRC may allow later/earlier claims.
Care needs to be taken with regard to the use of the asset throughout the entire period of ownership and the type of business the asset has been used in. In some cases, rollover relief can be denied or may be reduced, so take advice on your particular circumstances.
It is also possible to claim partial rollover relief where not all the proceeds are reinvested into new business assets. Example 1 - full rollover Net sale proceeds of land
£200,000
Less: Initial cost
£(120,000)
Gain on disposal before annual exemption
£80,000
Amount reinvested in a furnished holiday let (FHL)
£250,000
You can qualify for relief if you sell and reinvest in assets used as follows: Property used in your trade, such as a farm business but also extends to a furnished holiday let property.
Land disposed of under a compulsory purchase order (although special rules apply, which are not covered here). Temporary rollover relief can also be claimed by reinvesting into depreciating assets.
Provisional relief In many cases, you may find that you have a CGT liability on a disposal before you have established the claim for roll-over. In these situations, a provisional claim can be made on your tax return, so the CGT liability is not payable and funds remain available for reinvestment. Should you later decide not to go ahead with a qualifying reinvestment, there would be a claw back of the tax due, plus interest.
Full rollover relief is available as all the proceeds have been reinvested into a qualifying asset. Therefore the full gain is deferred. Example 2 – partial rollover Suppose instead the spend is £180,000 so £20,000 of the proceeds is not reinvested. The cash retained (£20,000) is therefore taxable now with the balance of the gain (£60,000) rolled over into the new asset.
Kate Hardy Farms & Estates Team kate.hardy@albertgoodman.co.uk
It’s a matter of TRUST Before I understood trusts, I was rather dubious. I thought they were complicated structures only set up for high-net-worth clients, and were either created as a tax loophole or to enable people to hide the true ownership of their property. While this may have been applicable many years ago, in recent years many of the tax loopholes have been sewn up and trusts are more transparent, following the introduction of the Trust Registration Service (TRS). You may than ask what are the advantages of setting up a trust and why and when would we look to use one? In simple legal terms, a trust is a relationship where property is controlled by one person (a Trustee) for the benefit of another (a beneficiary). The main tax benefit of a trust is that, while the assets are held in trust, as long as the settlor (the person who transferred the property into trust) is unable to enjoy or continue to benefit from the property within the trust, then the property falls outside of their estate for inheritance tax (IHT) purposes. While there are therefore tax advantages that can accrue to the settlor on creating a trust, the main reasons for using a trust have nothing to do with tax. One of the main reasons we recommend using a trust is for the protection of assets - although the settlor is giving away property and is therefore unable to benefit from it, a trust enables them to retain control of the assets (as a trustee) and the flexibility as to who should ultimately benefit from the assets, protecting assets for the future generations. Trusts are a particularly useful tool for grandparents. Depending on the type of trust used, the terms of the trust can enable funds to be accumulated when the beneficiaries are too young to receive the money and can then be distributed when the funds are required, say for school or university fees. The use of a trust therefore enables grandparents to retain control of how and when the income is taken and how it is used. It is also a very tax efficient way of funding the education of grandchildren.
I specifically talk about grandparents here as there are tax implications if the trust is set up by parents for their minor children. Creating trusts for appreciating assets, such as shares in newly incorporated companies or land outlined for development, can also be very tax efficient for IHT purposes as it removes the subsequent growth from the settlor’s estate. While having a trust set up in lifetime can result in IHT charges, the IHT is subject to a different set of rules and applied at much lower rates and so can often be easier to manage. While there would inevitably be some initial professional fees for setting one up, these are normally simple arrangements, and the running costs can be relatively small compared with the overall IHT saving. As with any other advice, our recommendations would be dependent on your particular circumstances and trusts are just one of the many tools at our disposal. Whereas a lifetime trust might be the right solution for one client or family, a family investment company might well be the better solution for another, or sometimes a combination of both. It is therefore important we understand your intentions now and for the next generations to come, in order to provide the right long-term solution for both you and your family.
Kate Hardy Farms & Estates Team kate.hardy@albertgoodman.co.uk
DOES THE BPS LUMP SUM STACK UP? Following the release of the BPS lump sum consultation, we have an initial guide for how the lump sum will be calculated. The lump sum payment has been suggested to be calculated at 2.35 times of the average BPS payment in 2018, 2019 and 2020. It will however be capped at £100,000, so for farms bigger than around 450 acres they will be capped at the £100,000 level. The rules to qualify for the lump sum are that the farmer is required to retire from farming, surrender their BPS entitlements and either sell, gift, or lease their farmland on a minimum five year FBT. Based on the proposals we can compare the estimated lump sum to the entitlements that might be paid until 2027, depending on the size of the farm as follows: 100 acre farm
200 acre farm
300 acre farm
400 acre farm
500 acre farm
600 acre farm
£
£
£
£
£
£
Estimated lump sum payment
22,212
44,424
66,635
88,847
100,000
100,000
Estimated payment for 2022 - 2027
25,455
50,909
76,364
101,819
127,274
152,728
As you can see above, for the larger farms the scheme looks like a no go, unless there is a need for upfront cash now. However, for those smaller farms with little or no succession then the prospect of receiving a lump sum could be an attractive retirement bonus. We are yet to hear how this lump sum will be taxed. However, I hope there will be a tax rate cap applied to ensure businesses are not taxed at higher rate, or that the lower capital gains tax rates would apply combined with business asset disposal relief.
Tom Stone Farms & Estates Team tom.stone@albertgoodman.co.uk
New turnover test for fifth SEISS grant claims HMRC is starting to contact those clients who they believe may be eligible to claim the fifth SEISS (selfemployed income support scheme) grant.
that you will suffer a significant reduction in trading profits in the annual accounts that the period May to September 2021 falls.
The fifth grant, which covers the period May to September 2021, was announced in the Budget in March but only limited guidance had previously been available.
Turnover test
The initial eligibility remains the same as the fourth grant so unfortunately if you weren’t eligible to claim the fourth grant, you will not be able to claim under the fifth grant. However, you do not need to have claimed the fourth grant in order to claim the fifth. To make a claim, you must be currently trading or are temporarily unable to because of government restrictions or other Covid impacts, and your trade must have also suffered by either reduced activity, capacity or demand as a result of Covid-19. You must also reasonably believe that this reduction will mean
In addition to the above, you will also need to complete a turnover test. This involves providing HMRC with details of your turnover for two periods - a period pre pandemic and a period during the pandemic. This turnover test will determine the amount of grant you will receive. If you commenced self-employment during 2019/20, you will not need to complete the test and instead will automatically receive the higher grant. The two turnover tests are very complex, and the figures for each are not simple to calculate so they need to be considered before making the claim.
The rate of grant The fifth grant will be based on 3 months average trading profits, in the same way as the fourth grant. HMRC will then compare the results of the two turnover figures provided and calculate what rate of grant you will receive. If your turnover decreased by over 30% during the pandemic period, you would receive 80% of 3 months average trading profits, capped at £7,500. If your turnover decreased by less than 30% during the pandemic period, you will receive 30% of 3 months average trading profits, capped at £2,850. If your turnover did not decrease, you will not be eligible for any grant. In response to HMRC’s guidance being released, various professional bodies have asked for clarification on multiple factors and also requested that the calculations are simplified to make the claims process more straight forward. We will keep you up to date of any changes made. Applications can be made from the end of this month (July) and HMRC will be contact with a timeslot that you can make your claim from, if you are eligible. Please note claims for the fifth grant must be made before 30 September 2021 when the applications will close. Due to the complex calculations involved in the turnover test and the impact any errors can cause, we encourage you to get in touch with your usual point of contact at Albert Goodman if you have any queries before you make any claims.
Think we could help? If you are reading this newsletter and are not currently a client of Albert Goodman we would be delighted to come out and visit you, on farm, free of charge. Albert Goodman is one of the largest firms in the South West, with a proud history stretching back over 150 years. By placing great emphasis on our client service ethos; we seek to build long-term relationships with our clients. We are able to provide technical expertise in areas such as VAT, tax, financing and financial planning and, as a specialist team of 30, our friendly Farms and Estates team act for over 500 farms and estates. Each member of our team has a background, education, or interest in farming
and rural businesses. This relatively unique combination of knowledge, experience, and technical skills helps build stronger relationships with our clients producing the right results for their businesses to achieve objectives. If you would like to know more about us and how we may be able to assist you and your business going forward, then please get in touch.
Kate Bell Farms & Estates Team kate.bell@albertgoodman.co.uk
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