Buying a farm or land: the tax considerations
3 Dec 2020
Whilst some farms remain in the same ownership for generations, the market for rural land and farms is currently strong thanks to eager new entrants to the farming community and landowners wanting to expand their operations.
This article considers some key decisions and considerations for those purchasing farm land, including the structuring of a purchase, VAT issues, capital allowances, the Annual Tax on Enveloped Dwellings (ATED) and Stamp Duty Land Tax (SDLT).
Who is the purchaser?
Before making an offer, a purchaser should consider whether any ownership structuring might be appropriate for the land and/or property acquisition.
In general, holding assets in personal names (either as a sole trader or in partnership with a spouse or civil partner) is likely to be the most straightforward. However, it is not uncommon to use a limited company or limited liability partnership (LLP) to acquire a farm or farmland. The obvious benefit is protection from liability, although insurance can be used to mitigate this risk if the farm is held personally.
A company is a separate legal entity and is taxable in its own right. Limited company accounts are required to be filed at Companies House, so there is a degree of public disclosure. There is also potentially a tax advantage to be obtained here: any income arising to a company is currently taxable at 19%, rather than up to 45% in an individual’s hands. Losses are available to be carried forward within the company, to be offset against future profits. However, consideration would need to be given as to how to extract funds from a company: if the shareholders require access to most of profits, the effective rates of tax on extraction are broadly equivalent to the additional rate of income tax on non-savings income.
Partnerships, on the other hand, are not separate legal entities and the profits or losses are ‘look through’ for the partners. This means that they are taxed on their share of partnership profits at their marginal rates, even if no income is withdrawn. Any losses should be available to reduce other taxable income, although may be subject to restriction. General partnerships are straightforward to set up and run: the partners do, however, have unlimited liability for partnership liabilities (which, as above, could be protected by insurance if required). LLPs are also look-through for tax purposes, but in many other respects are treated fairly similarly to companies: there is an annual Companies House accounts filing requirement, for example.
Where assets are held in a partnership, income passes to the partners on the basis of either an agreed split or the beneficial ownership of the property. Partners should consider whether the land and property should be held on the balance sheet of the partnership, or in the personal names of the partners. This, and the use of the land (for instance, whether there is a tenant in place) will impact the overall inheritance tax (IHT) position of the partnership.
Whilst the IHT position is outside the scope of this article, it is worth considering before a purchase is agreed; the longer-term intentions for a farm or estate might influence the way in which a purchase is structured at the outset.
It will be important to review the VAT position of land being purchased. If it has been ‘opted to tax’, the purchaser may wish to acquire the farming business as a ‘going concern’; failing that, the purchase price of the farm or land may be subject to VAT.
A farm with both agricultural enterprises and residential properties will be ‘partially exempt’ for VAT purposes, as it will be in receipt of both taxable and exempt income. VAT registration should allow some of the VAT incurred to be recovered, but any expenditure relating to the letting of residential properties will not be recoverable.
Are there capital allowances to claim?
The capital allowance position of any plant, machinery, fixtures and fittings should be reviewed; it may be beneficial for the vendor and purchaser to make a joint election, which would allow the capital allowance ‘pools’ to be carried forward. Of particular note would be any expenditure that has been incurred (under contracts entered into on or after 28 October 2018) that qualifies for the Structures and Buildings Allowances (SBA). The purchaser would be able to claim any unclaimed SBA, which was increased to 3% from 1 April 2020.
Annual Tax on Enveloped Dwellings
A major downside to acquiring a farm within a company is that, if residential property forms part of the holding, an annual charge applies, unless the property qualifies for one of a number of reliefs. This charge is referred to as ATED and would apply if shareholders or connected parties occupy any residential properties held by the company (even if they are paying a market rent to occupy). For context, the ATED charge for a property worth between £1 million and £2 million would be £7,500 for the 2020-21 tax year. Clearly, this could be a substantial annual cost if multiple properties attract the charge. Reliefs from the charge apply to commercially let properties (to third parties) and for farmworkers, although a claim for relief is required annually, adding to the compliance costs of running a company.
Stamp Duty Land Tax complications
SDLT is payable when land or property is purchased, but different rates apply for residential, commercial and mixed-use assets. Unless the transaction comprises a very straightforward acquisition of, say, additional farmland with no buildings, the SDLT position can quickly become complicated, particularly if multiple vendors are involved or the purchasing entity is a company. A purchaser would therefore be wise to obtain advice on the applicable SDLT rate.
There is currently an SDLT ‘holiday’ in place as part of the Chancellor’s economic recovery plan. This applies to the purchase of residential property until 31 March 2021, so completion prior to that date should result in an SDLT saving, even if only a small proportion of the purchase costs relate to residential property. Regardless of the ‘holiday’, a 3% surcharge will be applicable to the purchase of any residential properties if the purchaser already owns a residential property (whether or not that is their primary residence).
There are several different tax and practical considerations to be explored ahead of purchasing a farm or new farm land. Obtaining tailored advice ahead of a purchase is recommended to ensure that the most advantageous position for the purchaser and future generations is achieved.
Lucy de Greeff, Senior Manager, and Lizzie Murray, Director