Agricultural Focus Autumn 2024 by Hazlewoods

Agricultural Focus

FOCUS ON FINANCE

• Tax implications of finance

• UK arable market – the cash rollercoaster

• Can you see the wood for the trees?

• Pensions

• Meet the team – Alex Greves

Tax implications of finance

Most businesses use finance to support their day-to-day cash flow as well as for larger capital purchases, and our faming clients are no different. We typically see our clients using finance to fund new capital projects such as the purchase of additional land, renovation of farm buildings into a new rental business, or to help with the purchase of a new piece of kit.

The repayment of capital is not an allowable expense but interest payments and other finance costs can often be claimed. However, the treatment varies depending on the type of financing, and the person entering the arrangement.

This article considers the common scenarios in which finance is used and how tax relief can be obtained.

Types of financial arrangement

Simple loan or bank overdraft – provided the loan is used for the purposes of the trade, the interest incurred will be an allowable expense against trading income.

For residential rental businesses (including furnished holiday lets from April 2025) carried on by an individual or partnership, a deduction for mortgage interest is no longer allowable. Relief is instead received as a tax credit, restricted to 20% of the interest paid.

For commercial properties, and all letting carried on by a company, mortgage interest is an allowable expense.

Where there is private use, such as on the farmhouse, the allowable interest is restricted to reflect the business use.

Leasing – this can either be a financing lease, or an operating lease. A finance lease is where ownership of the asset is transferred to the lessee, whereas with an operating lease the ownership remains with the lessor.

In both cases, capital allowances cannot be claimed, and the lease cost is allowable for tax, restricted for any personal use made by individuals or partnerships. For finance lease the depreciation is also allowed.

Hire Purchase – a hire purchase agreement differs from a lease as at the end of the arrangement the asset is owned outright. Any interest paid on the agreement is a tax allowable expenses and capital allowances can be claimed on the cost of the asset.

Cars are often available through PCP arrangements. The treatment of these will be like a hire purchase arrangement but the availability of capital allowances will depend on the specifics of the arrangement.

Inheritance Tax (IHT)

The value of any outstanding loans on death are deductible from the value of the estate. However, care should be taken where an asset qualifying for IHT relief (agricultural property or business relief) e.g. farmland is purchased using a loan secured against an asset on which no IHT relief is available e.g. let property. On death the value of the loan must be deducted from the farmland rather than the cottage it is secured against. This can lead to the value of taxable assets in your estate being higher than expected.

Conclusion

Tax relief is usually available for costs of financing, but this can vary depending on the type of arrangement, the purpose of the loan and who is entering into it.

Consideration of the potential IHT implications of financing should also be considered as it can have an impact on the value of the estate on death.

Often there is a conflict between the relief for the costs of finance against income and the relief for IHT. In diversified businesses the rates of relief against income can also vary.

If you are considering entering a finance arrangement, ensure you fully understand the tax implications of it and take advice before signing on the dotted line.

UK arable market –the cash rollercoaster

The UK total income from farming is estimated to be around £7.9 billion with the wider agri-food sector estimated to contribute £127 billion to the UK economy. The agricultural landscape in the UK has faced significant challenges over the past four years, a key one being cost fluctuations. Varying weather patterns, disease and pest pressures have also given our clients something to lose sleep over.

The table below illustrates some of the price fluctuations UK arable farmers have seen over the last four years.

2024 2023 2022 2021

Milling wheat £255/t £275/t £345/t £200/t

Feed wheat £180/t £210/t £290/t £185/t

Malting barley £170/t £200/t £270/t £180/t

Feed barley £150/t £185/t £250/t £160/t

Oil seed rape £390/t £405/t £630/t £385/t

Fertiliser (AN UK) £339/t £465/t £839/t £283/t

Fertiliser (Gran Urea) £365/t £469/t £911/t £318/t

Red diesel 80.85ppl 89.05ppl 104.27ppl 65.64ppl

Average gross profit 54% 50% 62% 67%

Prices taken from Agriculture and Horticulture Development Board (AHDB) and Defra.

In 2021, there was a recovery in harvest yields following the challenging conditions of 2020; for instance, the wheat market saw an increase, with yields averaging around 7.1 tonnes per hectare (t/ha), up from the previous year’s 6.7 t/ha. Coupled with the low input prices this was a profitable year for many.

2022 saw Russia declare war on Ukraine, which was the start of the price fluctuations we have seen since. March 2022 saw record high oil seed rape prices of £800/t upwards, resulting in the 2022 harvest being another profitable year.

The price of fertiliser and fuel increased significantly with farmers being forced to purchase at high prices to meet on-farm requirements. Ammonium Nitrate (AN) fertiliser

reached a high of £870/t in September 2022, with some farmers paying more, which impacted the 2023 harvest results.

The UK harvest yields in 2023 were significantly impacted by pest pressures, particularly the cabbage stem flea beetle, which affected oil seed rape crops. Farmers were still battling with inflated fertiliser and fuel prices, although we did start to see a decline from January 2023 onwards. This decline in input costs was closely followed by a decline in sale prices, meaning the profits of the previous two years were not repeated. By 2023, many farmers were feeling the effects of the progressive reductions in BPS and for those who hadn’t got to grips with new SFI and Stewardship schemes available, cash was tight.

The most recent harvest in 2024 has been particularly challenging. The wet autumn and winter, coupled with the spring being either too wet or too dry, created difficult growing conditions. Although the 2024 harvest has been never ending for many, the results seem positive.

The big swing in costs and output prices, along with tax bills for good years falling in less good years, has resulted in cashflow pressure for many farming businesses. Those with variable rate borrowing have also had to manage the effect of the rise in interest rates. Cashflow forecasting is essential to help businesses manage these fluctuations and to plan when additional finance may be needed.

Diversification projects are a way to mitigate the risks of the volatile UK harvest results and landowners should be looking to get the maximum output from their assets. A good starting point is identifying any areas that are not generating income, e.g. farm buildings that could lend themselves to commercial letting, and assessing the options for generating additional income.

If you are unsure of where to start or have concerns over cashflow forecasts please do get in touch.

Can you see the wood for the trees?

Most farms have some woodland, be this a commercial woodland enterprise, amenity, or short rotation coppice. The tax treatment of woodlands can be generous but depends on the type of woodland. In this article we explore the tax implications for each type.

Types of woodland

Amenity woodland - generally ancillary to farmland, for example shelter belts and game cover. When occupied as part of a wider farming business the woodland is treated as part of the land farmed.

Commercial woodland - managed on a commercial basis and with a view to the realisation of profits. The commerciality of woodland should be evident from the way the woodland is managed and a woodland management plan in place and followed.

Short rotation coppice - a perennial crop of trees with a regular growth and harvest period. For tax purposes it is treated as farming.

Income tax

Amenity woodland - the sale of felled timber is included within the farming accounts and taxed accordingly. Any expenses of managing the woodland is a deductible expense.

Commercial woodland - outside the scope of income tax and corporation tax, and, therefore, no tax chargeable on timber sales, but expenses of planting, management, etc are not deductible from profits for tax purposes.

Short rotation coppice - this is treated as farming income, and expenses are allowable.

Woodland grants - grants must be looked at on a caseby-case basis, with some being taxable and others not.

Capital gains tax (CGT)

For commercial woodland the sale of trees, whether standing, or felled is exempt from CGT.

When woodland is sold standing, the sale price is split on a just and reasonable basis between the value of the trees and of the underlying land. A taxable gain, or loss will arise on the land. Rollover relief maybe available depending on the circumstances.

Holdover relief is available on the gift of commercial woodlands, or woodland qualifying for inheritance tax agricultural property relief (APR).

Business asset disposal relief may be available if a woodland trade ceases.

Receipts in respect of felled trees from agricultural or amenity woodlands are within the charge to CGT. However, each tree is treated as a single chattel meaning gains are only taxable if they exceed £6,000 per tree.

Inheritance tax (IHT)

APR is available on amenity woodland if it is occupied with agricultural land, or pasture. APR is also available on short rotation coppice.

Commercial woodland should qualify for business property relief (BPR), giving 100% relief from IHT, providing it has been owned for at least two years.

For woodlands that do not qualify for either BPR or APR, woodlands relief is available providing it has been owned for at least five years prior to death. This allows the IHT on death that is due on the value of the growing timber to be deferred until such time as the trees are sold. The value of the underlying land is subject to IHT on death.

VAT

Timber sales are standard rated for VAT purposes, as is firewood if it is sold to a commercial business. The sale of woodchip or firewood is eligible for the reduced rate (5%) if the sale is to a domestic user.

Providing there is an intention to make taxable supplies the woodland business can be included within the farming business for VAT.

Christmas trees

The growing and sale of Christmas trees is a popular diversification route. The sale of Christmas trees is a trading income, is chargeable to income tax (or corporation tax), it is also subject to VAT.

Conclusion

The tax position for woodland is not always straightforward. To ensure you are treating the income and expenditure correctly and are able to claim the capital tax reliefs you are expecting, it is worth periodically reviewing what is happening on the ground to make sure you are meeting the relevant requirements. For commercial woodlands having a woodland management plan and records to demonstrate implementation is essential if any form of relief is sought.

Pensions

Many of us pay into a pension to help fund our retirement, and whilst this remains the primary driver for most, in recent years we have seen many more using pensions for legacy planning.

Pensions & Income Tax

Pension contributions offer full income tax relief in the year they are made, so can be a very tax efficient way to save for the future. The income tax relief on pension contributions can be claimed in several ways, but the two usual methods are:

1) Employees/directors – The company will make a pension contribution as part of the remuneration package, often matched by the employee. This payment will be tax deductible for the company, and there would be no income tax or NIC for the employee.

2) Sole traders/partners – The taxpayer will contribute from their net income. The pension fund will reclaim basic rate tax from HMRC (20%) and the taxpayer can claim higher rate tax relief through their tax return.

Both ways result in tax-free contributions being made into the pension fund.

It should be noted there is a maximum amount of pension contributions which can be made each year with the above tax relief, and in the current year this is the lower of: The taxpayers’ earned income for the year

£60,000

What constitutes earned income is wide reaching, but typically includes salary/trade profits but excludes rental income. Farm partnerships which have a year of lower farming profits, or where profits are being averaged but retain a high level of rental income will need to consider carefully what pension contributions they can make.

In addition, the £60,000 limit can be reduce when an individual’s income exceeds £260,000. These rules are complex and should be considered in detail prior to making any pension contributions.

Pensions & Inheritance Tax (IHT)

In most cases, pensions are free of IHT, providing there is discretion to the trustees as to who the death benefits will be paid to.

Whilst this isn’t normally a problem for modern pensions, certain older pension types do not cater for this. Where there is no discretion on where the payment is to be made, the pension will likely form part of an individual’s estate and will be subject to IHT (though the usual IHT spousal exemption will apply where benefits are left to husband or wife).

If you have a pension fund, it is an important part of your IHT planning to check whether it will form part of your estate for IHT and take appropriate actions to change this if needed.

Where IHT doesn’t apply, there may still be other tax consequences to be aware of.

Where a pension member dies under the age of 75, their pension will be free of any tax.

Whereas for members dying after 75, their benefits will be subject to income tax at the beneficiary’s marginal rate, when they draw benefits. There are a few ways that pension death benefits can be paid, though not all schemes will necessarily offer each.

The most appropriate option will be dependent on the individuals’ circumstances, and each option can result in significantly different tax outcomes.

When coupled with the potential income tax savings, pensions can provide a great opportunity to save income tax as well as pass assets to future generations.

There is a lot of talk about the income tax and IHT benefits being tapered down in the upcoming budget, so it may be worth discussing them with your financial advisor, or one of Hazlewoods Financial team whilst the opportunity remains.

Note, this article only relates to the death benefits associated with defined contribution pension plans only.

Meet the team: Alex Greves, Manager

Tell us a bit about your career so far

I was flicking through the Farmer’s Weekly in summer 2015 and came across a job advert which is where my career started with Hazlewoods. I joined as an Association of Accountancy Technicians (AAT) apprentice and went on to study and become an Associate Chartered Accountant in 2020, studying for my final exams online and sitting the exams during Covid.

I then moved to a four-day working week, allowing time to support my own family’s farm and furnished holiday lets on a Friday.

What is it like being an accountant in the agricultural sector right now?

With the Autumn budget coming up on 30 October, there are many questions and some concerns on farmers’ and landowners’ minds. The reported capping of inheritance tax relief available for businesses and agricultural assets per person has been the topic of many conversations recently. Tax is almost always in the forefront of our clients’ minds, which goes hand in hand with cash flow concerns.

The recent weather challenges and delays in many harvests this summer are another talking point, some clients will likely be seeking additional finance over the next year to balance the effects of the adverse conditions.

Why Hazlewoods?

The Farms and Estates team has such a great mix of interesting clients, from the smaller family farms to the larger estates with extensive diversification. I really enjoy building a personal relationship with my clients and being able to make a difference to their business is the most rewarding part of the job.

One of my favourite day-to-day elements is working with like-minded people and building relationships with other professionals in the sector. The Farms and Estates team has expanded greatly since I joined and is made up of people with, and without farming backgrounds. I really enjoy supporting new recruits and seeing them learn about the ins and outs of farming, and the challenges facing the industry. The team has a vast expanse of knowledge which can play a part in supporting the future of farming, something I am hugely passionate about.