newsletter SPRING 13
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issue SPRING 13
Land and Property - is it protected?
Joint Ventures 04 Capital Allowances - Tax Planning
Taking advantage of new opportunities
Welcome to the spring issue of Moore Scarrottâ€™s Agricultural Newsletter. In this issue we look at partnerships, joint ventures and taking advantage of tax opportunities. We have used case studies throughout to illustrate the points of most importance to consider whilst reading. The farming year of 2012 will be remembered for all the wrong reasons with the MET office revealing that it was the second wettest year on record. Despite this the last three years have been generally good years for UK agriculture. Agricultural land values remain at an historic high, and banks are willing to lend money to an industry they recognise as healthy and robust.
However, volatility will remain and with the rise in food prices over recent years, retailers will be looking at their own margins and assessing how much they are willing to pay the primary producers. The risks will remain, but the agricultural sector is accustomed to dealing with change. As agriculture specialists, we understand the challenges that farming presents. We have a dedicated team of agricultural specialists, many of whom have an agricultural background.
We hope you find the articles in this update of interest. If you would like to discuss any of the points raised, please get in touch. For a free of charge, no obligation initial meeting, please contact us.
Contact Information: Calyx House, South Road, Taunton, Somerset, TA1 3DU T. 01823 282100 E. email@example.com W. www.moore-scarrott.co.uk
The content of the articles in this publication are for general information only and not intended to address particular situations. Articles should not be relied upon in entirety and should not be taken as advice. Information is accurate as of the date it is written but is subject to change. No individual or company should act upon such information without receiving appropriate professional advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. ÂŠ Copyright Moore Scarrott May 2013.
Land and Property - is it protected? Take a husband and wife farming partnership owning and farming 350 acres of farmland, historically shown as an asset on the balance sheet of the partnership. Their married son subsequently joins the partnership and it is agreed that he receives a share of the farming profits year on year, but is not entitled to a share of the underlying land and property. Advice is given at the time of the son’s appointment to remove the underlying land and property from the balance sheet as, should the son divorce, die or leave the partnership, there could be a claim on the underlying land, despite the fact it is owned by mum and dad.
So what are the tax implications of removing it from the balance sheet? Inheritance tax is the main issue. Farmland normally qualifies for Agricultural Property Relief (APR) at 100%, meaning the Agricultural value of the land escapes inheritance tax provided: 1. 2.
It is used for the purposes of agriculture by the owner for a two year period or; It is used by another (or a partnership) for the purposes of agriculture for a seven year period and the owner is able to obtain vacant possession within 12 months.
With (2) above, if vacant possession cannot be obtained within 12 months, the rate of APR will drop from 100% to 50%.
So how should the assets be protected and continue to qualify for 100% APR? Land will qualify for 100% relief where the partner(s) owning the land can obtain vacant possession within 12 months, although this could be challenged by HMRC where there is no written agreement defining the terms of occupation. 100% relief will be achieved where the land is let to the partnership under a tenancy that has started after 1 September 1995.
Are there other issues if land is removed? If there is borrowing attached to the land, its removal from the balance sheet could cause issues with the bank and pose problems in obtaining tax relief on the loan interest. Furthermore, the removal of the assets may jeopardise the future claim to BPR (Business Property Relief) on rental properties as previously determined in both the ‘Farmer’ and ‘Balfour’ tax cases. Recovery of VAT on repair and maintenance of rental assets will no longer be available. The farmhouse also needs consideration, APR could be jeopardised on the agricultural value of the farmhouse if removed from the balance sheet. This is, to an extent dependant on the pending appeal by HMRC on the Tribunal’s decision in the Hanson case.
Does the land have hope value – could there be planning permission? If the land has planning permission, the excess value, over and above agricultural value, will obtain BPR at 50% if held off balance sheet. 100% should be obtained if within the balance sheet.
Can we protect the assets, claim 100% APR and keep the land on the balance sheet? Yes, provided the following is addressed: 1. Get a well-drafted partnership agreement, confirming vacant possession given by the partnership to the owners within 12 months. 2. Create a land capital account (aside from the existing current account) for the members owning the land. This should equate to the cost of the associated land. 3. Notes to the accounts – include a detailed note in the annual accounts detailing ownership between the relevant members.
Advice should always be taken when considering introducing land and property into a partnership. In addition to the issues raised above, there could be stamp duty land tax issues. If in doubt, please get in touch.
Joint Ventures? Collaborative ventures, such as contract or share farming arrangements, can produce the classic ‘win-win’ situation, providing equal benefits to both parties, as long as they are set up correctly. Moore Scarrott was recently involved in setting up a share farming venture on a client’s farm. The farm is relatively small (under 200 acres) and carries a flock of early lambing ewes and a small herd of suckler cows. The owner has interests away from the farm and had always employed a manager to deal with the day to day running of the farm. With a manager’s salary to pay, the farm was never going to be highly profitable but, on average, broadly broke even which was all that the owner required. The manager was approaching retirement and we were asked to advise how the farm should be run in the future – with one proviso: the farm must continue to have a flock of sheep. Finding a replacement manager was never going to be easy. On the one hand they needed the ability and enthusiasm to take on full responsibility for the farm in the owner’s absence but, on the other hand, not the level of ambition that would mean they would be looking for a larger farm to run within a few years. A collaborative arrangement, whereby the farm could be combined with another to gain the necessary economies of scale seemed to be the answer. The owner had no experience of such arrangements and was initially a little apprehensive about the concept. However he could see the benefits and was persuaded to sound out the potential interest. As well as the overriding wish to continue with sheep, the owner also required the new person to live in the farm cottage so he could take on an estate caretaking role. He was also keen to give a new entrant to the industry a chance to start farming on their own account. We were able to use our network of contacts in the industry to provide the client with a list of a dozen or so potential candidates. We were further instructed by
the client to meet the list of candiates and review their business plans and suitability for the position. The many expressions of interest received were wittled down to the successful applicants – a young couple with some land and buildings of their own and a flock of pedigree sheep. Both had full time jobs but the husband gave up his job to manage the farm whilst his wife carries out the administration and helps at the week ends. The pedigree flock now runs alongside the commercial flock. We worked with both parties to draw up agreed terms for the share farming agreement. Once established the share farmers intend to take on additional land (either by purchase or tenancy) to put into the share farming arrangement and build up their share in the arrangement and their farming equity.
Why a share farming agreement? Employment of a manager was ruled out for the reasons explained previously. It was important that the owner continued to trade as a farmer and so granting a tenancy was not an option. A collaborative type of arrangement was therefore the only sensible option. In many situations a contract farming agreement is simpler to set up and administer. However the situation where both parties are contributing land and livestock to the arrangement fits more closely with the share farming model than with contract farming. Share farming involves two parties pooling their resources (land, management, labour and livestock) to run a farm whilst retaining their separate farming businesses. The income and operating costs are shared between the two parties in proportion to their respective contributions of resources.
ADVANTAGES OF SHARE FARMING Farmer
• Day-to-day management of the farm taken care of
• Provides an opportunity for a new entrant to farm on their own account without the high capital requirement
• Retains control of how the farm is run • Economies of scale from combining with share farmer’s land and creating a viable holding • Estate maintenance duties of share farmer incorporated into the agreement • Share farmer incentivised to make the combined farm business profitable • Continues to trade as a farmer with his own separate business
• Flexibility to increase their share in the arrangement and build up equity over time • Economies of scale from combining with farmer’s land and creating a viable holding • Share farmer benefits from the owners knowledge and experience • Financial risk (as well as reward) is shared • Retains his own farming business
Capital Allowances - Tax planning Opportunity? On 1 January 2013, the annual investment allowance increased from £25,000 to £250,000 so there is potentially plenty of scope for expenditure on capital items which will qualify for 100% tax relief. The amounts available will, of course, depend on your accounts year end and, if you are planning substantial expenditure, contact us to ensure correct timing. An important tax case concerning J D Wetherspoons, the pub operators, established that certain expenses connected to the installation of plant and machinery could be included in the claim to capital allowances. This included alterations to an existing building, reinforcing the floor to take the load of the new equipment which the Tribunal decided was required for the purposes of the particular trade and brick and block work to enable movable partitions to be fitted to cubicles. The Tribunal also agreed that a proportion of the professional fees, e.g. architects and planning fees attributable to the qualifying work could be included in the claim.
Whilst this case concerned public houses, we can apply the same principles to any business, including a farm. It is more important than ever that we can establish what is included the costs of building work so that we can ensure they attract as much tax relief as possible. For example: • What are the planning fees associated with installing a wind turbine? • Are specific alterations required to a building to enable the installation of a particular item of plant or machinery? • Can you identify all the costs associated with drilling a borehole and installing the pump etc?
Taking Advantage of New Opportunities There has been a lot of uncertainty regarding tax relief for owners of Furnished Holiday Lets (FHLs) over recent years. Now that new rules are in place, it is a good time to check your lettings still qualify for special tax reliefs and consider tax planning opportunities. What are the tax advantages of a FHL?
Increasing the number of days let
Profits from properties that qualify as FHLs are treated as trades for some tax purposes and enjoy tax advantages over other let properties:
From 6 April 2012, the tests became stricter with regard to the number of days your property needs to be available and the number of days it is commercially let:
Entitlement to plant & machinery capital allowances on fixtures and furniture (see newsbite on next page)
Capital Gains Tax reliefs – the ability to rollover gains, holdover gains on disposal and the potential to qualify for a 10% tax rate on disposal
• Profits count as earnings for pension purposes • Profits can be split between the owners by agreement each year
The new conditions are much harder to meet and some owners with a seasonal trade or operating within a niche market may suffer. If you believe you may fail to meet the new qualifying conditions then we can assist you with considering your options.
With careful planning, it may be possible to retain the tax beneficial FHL status. Options include averaging the number of days let (if you have more than one FHL) or taking advantage of a “period of grace”. Going forward it will be important to consider whether the lettings test can be met by existing demand or whether to increase marketing or special offers in light of what tax advantages FHL provide to you.
Exit strategy If your FHL may not qualify under the stricter new rules you may wish to consider options such as: •
Gifting the property while it qualifies so that any gain can be “held over” and no Capital Gains Tax arises
• Selling the property to achieve a potential 10% tax rate instead of 28%.
Newsbites Do I have to pay nursing home fees?
The government says it will spend an extra £1bn a year by 2020 helping older people in England pay for long term care. At present, if you have over £23,250 in capital you will be assessed as being able to meet the full cost of your care.
The Dairy Fund is now open for applications and the submission deadline has been extended to 3 June 2013.
When the new scheme begins in April 2017, there will be a cap of £75,000 on the total amount any individual will have to pay for their care. However, the reality is not quite as simple. • •
The cap element applies only to the care element of the cost. The cost for food and renting are not covered. The £75,000 is not going to be worked out as an amount of money. The local authority will work out a standard fee for the care the individual needed. This will apply regardless of how much the individual actually paid.
Grants are available from £25,000 to circa £1million. Projects will be considered if they encourage the establishment, development and expansion of cooperation structures. The objectives of the cooperation activity must be to strengthen members connection with their market(s), enable dairy farmers to explore and develop new market opportunities. This will ultimately improve farm profitability and long term sustainability of the dairy sector.
Tax relief for fixtures in Furnished Holiday Lets
If assets are given away to protect them from nursing fees, there are rules that can be invoked treating the asset as still being owned. The local authority can also recover the cost of your care fees from the person(s) who received the gift. Therefore caution is needed.
Many owners claim allowances on the furniture included within the property, but miss out on substantial tax relief for fixtures such as hot water systems, electrical and lighting systems, bathroom equipment or kitchens.
Early planning is needed to ensure you can be in control of the potential care home issues that might be faced later in life.
If you think this will not be worth pursuing due to the fixtures being old and having little current value, you may be surprised by the fact that many claims are based on the current replacement value of fixtures, which can be substantial.
Capital gain on Milk Link/Arla merger In October 2012, Milk Link members should have received a cash payment of approximately 57p per £1 held on their members Qualifying Loans following the merger with Arla. This is a ‘part disposal’ with no base cost, which will be taxed as a capital gain. This gain will be taxed at either 18% for basic rate taxpayers or 28% for higher rate taxpayers. There are ways to mitigate this gain and avoid any capital gains tax payable. Many farmers may have brought forward capital losses available to use. It is certainly worth looking at crystallising losses on any purchased milk quota with a negligible value claims (i.e it is worth next to nothing). With the merger payments falling in the 5th April 2013 tax year claims should be made on the 2013 Self Assessment Tax Returns to avoid any capital gains tax due in January 2014.
For example, in a Furnished Holiday Let costing £500,000 there may be over £100,000 of fixtures qualifying for relief. A higher rate taxpayer may benefit from £40,000 of tax relief over the life of the claim. There are also important changes to the rules on fixtures applicable to anyone considering buying or selling a Furnished Holiday Let, which have an important commercial impact.
Marcus Longbottom FCA Partner
Mark Shelton FCA Associate Partner
Telephone & Email: 07712 931993 firstname.lastname@example.org
Telephone & Email: 07900 823107 email@example.com
Marcus joined the partnership in 2007 having previously been a partner in a South Yorkshire practice. He qualified in 1992 and become a fellow of the Institute in 2003. Marcus has extensive knowledge and experience of the Agriculture and Rural Business sectors and is one of the partners responsible for our Agricultural clients.
Mark spent ten years in practical farming and farm management consultancy before entering the accountancy profession. After 12 years with Big 4 firms and ten years running his own Somerset based practice, working almost exclusively for clients in the food and agricultural industries. Mark joined Moore Scarrott in 2011 to head the firms Agricultural and Rural Business team.
Simon Tapp ACA FCCA Senior Agricultural Manager
Angela Wych FCCA Senior Agricultural Manager
Telephone & Email: 01823 282100 firstname.lastname@example.org
Telephone & Email: 01823 282100 email@example.com
Qualifying as a Chartered Certified Accountant in 1999 and becoming a fellow of the Association in 2004, Simon has been with Moore Scarrott since 2005.
A Devon farmers daughter, Angela joined the practice in 2003, qualifying in 2005 and becoming a fellow of the Association in 2010. She manages a portfolio of farming and rural business clients across the South West and maintains a healthy practical perspective on farming by helping out on the family dairy and sheep farm.
A farmerâ€™s son from Mid Devon, Simon provides accounting, tax and business advice to smaller incorporated and non-incorporated businesses, owner managers and sole traders, including Agricultural and Rural based businesses.
www.moore-scarrott.co.uk Calyx House, South Road, Taunton, Somerset, TA1 3DU T. 01823 282100 F. 01823 254396 E. firstname.lastname@example.org The content of this newsletter is for general information only. It should not be relied on and action which could affect your business should not be taken without appropriate professional advice. Moore Scarrott is the trading name of The Moore Scarrott Partnership LLP, a Limited Liability Partnership, registered in England & Wales No. OC329196. Registered Office: Calyx House, South Road, Taunton, Somerset, TA1 3DU. Regulated for a range of investment business activities by the Association of Chartered Certified Accountants. If you do not wish to receive future copies of this publication please contact Martha Harley at email@example.com
Published on Jun 4, 2013
The latest news for Rural and Agricultural businesses from Moore Scarrott Chartered Accountants