UK farmers have had plenty of notice about the tapering of Basic Payment Scheme (BPS) grants, with the introduction of the Environmental Land Management Schemes (ELMS) just around the corner.
As the phasing out of BPS starts to take effect, many have used the change as an opportunity to step back and assess the profitability and future direction of their farming operations. Is it time for a change? In this article we consider some options available to farmers who may be considering their next steps as grant funding shifts.
One of the ways that business owners might consider reshaping the basis of their farming operations is via contract farming or share farming arrangements.
A contract farming agreement (commonly referred to as a CFA) is a contractual arrangement whereby a landowner provides the land and incurs the financial costs of inputs such as seeds and fertilisers, whilst another party provides contracting services – for example planting, spraying and harvesting. The landowner receives all the income from the operation, whilst the contractor is paid a fixed fee to undertake the work required. If there is a surplus at the end of the year, this is divided between the two parties on a pre-agreed basis.
A CFA will often mean that the landowner can sell now-redundant machinery and release cash. Farm machinery is typically not chargeable to capital gains tax (CGT), but taxpayers should be aware that a capital allowance balancing adjustment may arise on the disposal of the equipment. This may have income tax or corporation tax consequences, depending on the structure of the farming operations.
The implementation of a CFA can also potentially retain inheritance tax (IHT) reliefs on the land being farmed. Careful drafting of the CFA will be required and the terms of the CFA need to be implemented to make sure that the arrangement does not cause unintended IHT consequences.
On the other hand, a share farming agreement usually sees two landowners pooling their land areas and farming them collectively, thus sharing in the expenses and profits of the enterprise. This means that there are no fixed inputs or outputs and there is a greater degree of inherent risk for both parties. However, the landowner should be able to retain existing IHT reliefs on the land being share farmed.
Alternatively, taxpayers may take a wider view and wish to consider whether the changes present a fork in the road for the operation of their business altogether. An outright sale of an entire business is unlikely to fit in with many families’ plans for succession and continued ownership of farms that have been held by one family for generations. But might this be an opportunity to review the ownership of land, potentially selling off small outlying parcels of farmland, or exploring sites with development potential on the edge of existing areas of residential and/or commercial property?
The key tax to consider when selling land is CGT. Taxpayers may find it helpful to bear in mind the rules relating to small part-disposals. These rules state that where part of a land holding is sold, an election can be made such that the transfer should not be treated as a disposal for CGT purposes. There are three conditions which all must be satisfied:
- Consideration does not exceed 20% of the market value of the entire holding at the time of the sale or transfer; and
- Consideration does not exceed £20,000; and
- Consideration for all transfers of land made by the taxpayer in the tax year in question does not exceed £20,000.
Where these conditions are all satisfied, the taxpayer can deduct the consideration from the allowable expenditure on the landholding in computing a gain arising on any later disposal of the land. This small part-disposal rule may be helpful in cases where outlying parcels of land are sold.
If an outright disposal of a business or a separate part of the business, including the farmland, emerges as a possibility, the taxpayer (or taxpayers) could consider whether the conditions for Business Asset Disposal Relief (BADR) may be met. This relief, which is the less generous replacement to Entrepreneurs’ Relief, allows for the first £1 million of capital gains arising on qualifying disposals to be taxed at a reduced rate of 10% CGT. It is also worth bearing in mind that a BADR-qualifying disposal may also arise on the gift of a business to a connected party for CGT purposes, for example, a son or daughter. Taxpayers could therefore crystallise a capital gain at lower rates of CGT whilst ensuring that an asset remains in the family: although should be mindful that if the gift is made for nil consideration, the resultant tax charge will need to be funded from elsewhere.
Overall, it is likely that the changing face of agricultural subsidies will present an opportunity for many farmers to review their businesses. Where a scaling down or scaling up of operations is being considered, taxpayers should seek tax advice to ensure that the costs and benefits of making any changes are fully reviewed to enable well-informed decisions to be made for the future.