Tax opportunities for UK farmers and agricultural businesses

Are there tax opportunities for UK farmers available in 2022?

Annual Investment Allowance, Agricultural Property Relief, and farmers’ averaging are generous tax reliefs for UK farmers and owners of agricultural businesses. However, each has some detailed rules that you need to be aware of – particularly as UK farming brings unique tax reliefs and rules.

Annual Investment Allowance

The Annual Investment Allowance (AIA) was increased from £200,000 to £1 million on 1st January 2019. It has been confirmed by the Chancellor that this will stay in place until at least 31 March 2023. The AIA provides a 100% deduction for the cost of plant and machinery (excluding cars) purchased by a business, up to an annual limit, and is available to most businesses.

On 1 April 2021, the government introduced the super-deduction which is a 130% first-year capital allowance for qualifying plant and machinery assets. There is also a less generous 50% first-year allowance for assets qualifying for the special rate pool. The super-deduction will allow companies to reduce their tax bill by up to 25p for every £1 they invest. However, it is important to note that the super deduction is not available to unincorporated businesses.

Now AIA has increased to £1 million this is a very generous figure and is one of the best tax opportunities for UK farmers. As the cost of agricultural machinery and equipment is very high, maximising the opportunities of the AIA could be essential for farmers. If you are considering purchasing any farming equipment it is important to note that the £1 million allowance could be significantly reduced in March 2023.

Caution

You will need to be very careful of timings in order to maximise your AIA. You also need to decide whether or not now is the right time to use the AIA to reduce your tax bills. Using the AIA to reduce tax bills in the agriculture sector or keeping cash reserves is a topic we have covered before.

Whether or not now is the right time for farmers to use AIA to reduce their tax bills depends on specific circumstances. Given the uncertainty in the sector and the ongoing fluctuations of profits – both heavily influenced by supermarket price wars amongst other things – now might be the time to keep cash reserves rather than spend. When cash flow is tight and you have no spare funds to purchase machinery, spending to theoretically reduce your tax bills through AIA may not be the right option for your business.

Farmers’ averaging relief

Farmers’ averaging is a unique tax rule, introduced to limit fluctuations in farmers’ tax bills – which can happen for any number of reasons, such as the weather or a poor harvest.

Provided that certain conditions are met farmers can claim this special relief where they can average their profits from farming or market gardening over 2 years or 5 years.

Agricultural Property Relief

Agricultural Property Relief (APR) essentially provides 100% relief from inheritance tax on the agricultural value of land and property where certain conditions are met. Inheritance Tax (IHT) is becoming increasingly complex and potentially expensive for farmers and their families. APR could therefore provide an invaluable relief.

The Farmhouse

It should be noted that the agricultural value of farmhouses can qualify for APR but stringent conditions must be met. It is likely that the open market value of a farmhouse is more than the agricultural value. Therefore, even if APR is available there could be some IHT exposure on a portion of the value. The main residence nil rate band is capable of being applied to farmhouses where the farmhouse is passed to a direct descendant.

This may therefore provide some further IHT relief for farmers.

The current allowance for the residence nil rate band for Inheritance Tax is £175,000.

This extra allowance is transferable exactly as the current nil rate band is now, and for a surviving spouse/civil partner who has been widowed before 6 April 2017, there is a transferable allowance of £100,000 if the survivor dies on or after that date.

One important point to note is that the main residence nil rate band will be reduced by £1 for every £2 that the value of an estate before reliefs exceeds £2 million. Since the value of estates for many farmers will exceed this threshold it is vital that they engage in IHT planning with a view to reducing the value of their estates.

This may then enable them to benefit from the main residence nil rate band and in turn reduce their IHT exposure.

Caution

APR and the new additional main residence band are extremely generous tax reliefs and, as such requires you to meet certain and complex qualifying conditions. Another key thing to remember is that APR is an all-or-nothing relief – if you don’t meet all of the detailed conditions, then you will not qualify. Planning is essential, and so is making a will that is tax efficient.

We advise farmers to regularly review their activities to ensure their business is structured to take full advantage of APR and maximise other reliefs available. For more information, we recommend you read HMRC’s rules and guidance on APR here.

How can we help?

At Hawsons our experienced tax advisers can help and identify which tax reliefs your agricultural business may be eligible for. We are very experienced at providing a full range of accounting, tax, and financial planning services for agriculture businesses and have extensive knowledge of the sector.

If you believe your business may be eligible for any of these tax reliefs it is vitally important to seek expert advice. The rules and conditions of these tax rules are extremely complex and our tax experts can check your eligibility and help you make the most of your claim as well as identify any further tax reliefs your business may benefit from.

Contact us today!

More from our agriculture experts

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