Whether you have a legal, tax, insurance, management or land problem, weekly farmersBusiness Clinic experts can help.
Here, Andrew Robinson, Partner and Head of Agriculture, Armstrong Watson advises on stock valuation when disposing of herd or herd.
Q. My wife and I have been trading for many years in partnership and we plan to make things easier by selling our cattle and sheep.
We will then debrief with other farmers or issue short-term grazing licenses on the land. What are the tax consequences of doing this?
A. It’s a big decision for any farming family, but it’s a common way to reduce workload, especially around calving and lambing.
To answer the question, we must start by looking at the way in which livestock, and in particular breeders, are treated in the accounts.
Normally, the profit on the sale of animals, the difference between the selling price and the value of the stock, is subject to income tax.
When a herd consists primarily of home-raised animals, there can be a big difference between the selling price and the book value of the animals.
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However, agricultural businesses can choose to count breeding animals on a herd basis, which can both simplify annual stock assessments and reduce tax liabilities on permanent reductions in numbers.
The key points regarding the base of the herd are:
- An election must be made within two years of the end of the accounting period in which the herd is first held.
- In the case of a partnership, another possibility of choice arises when there is a change in the partnership, either a partner joins the partnership or leaves it.
- In general, all mature breeding animals are included in a herd-based election, but this rule is relaxed for bred herds where immature replacements may be included.
- Once an election has been made, the animals in the herd are valued for tax purposes at the cost of the original animals, rather than the cost of the replacement animals. As mentioned above, this simplifies the annual evaluation process.
- When all or a significant portion of a herd or herd is sold, the profit is exempt from tax, which for a herd or herd kept for many years can be a significant sum.
- If the same partnership repurchases a herd within five years of the transfer, some or all of the base profit of the herd becomes taxable.
Proceeds from the sale of non-gregarious animals will be taxable in the normal manner and will be included in taxable profit. This may result in a higher than normal profit.
However, you intend to continue agricultural activity by issuing grazing permits on your land, and provided that you perform acts of ranching on the land, you will still be considered to be carrying on a farming business.
One of the benefits of this is that you will be able to claim the average farmer to avoid paying higher income tax rates on the proceeds of the dispersion.
Other benefits of continuing to be treated as a commercial farming business include the ability to remain VAT registered and reclaim VAT on expenses, as well as inheritance tax benefits on your farm and buildings.
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