Although full relief can apply to most farmers for inheritance and capital gains taxes, farmers should still seek advice from professionals to make sure their succession plan has no tax liability.

Speaking at a recent financial planning event in Portrush, Peter Brown from Greer Hamilton Gailey Solicitors said that farmers should maintain regular contact with professional advisers.

“As solicitors, you usually only see us when its time, or well past the time, to make a will. For accountants, you usually only see them once a year. Just because your asset is agricultural and can benefit from various tax reliefs, doesn’t mean that you should take an ostrich attitude and hope everything will be alright,” he said.

He advised all farmers at the event organised by CAFRE and Rural Support to make a will and keep it under review throughout their lifetime. He also recommended drawing up an enduring power of attorney (EPA) document when making a will. An EPA nominates one or more persons to look after the donor’s financial affairs if they become mentally incapable.

“Statistically, this only happens to one in five people. EPAs are simple and inexpensive documents. If an EPA is not made and the person becomes incapable, then it requires a controllership order to put someone in charge and this is around five or six times more expensive,” Brown said.

Relief

For farms that are not transferred until death, 100% agricultural property relief (APR) on inheritance tax is available for farm buildings and land. APR applies if the owner has occupied and used the property for agricultural purposes for two years or more, or if the property is leased out, has owned it for seven years or more.

“Farmers, with a little bit of planning, and a little bit of time, should be able to avoid inheritance tax,” Brown said.

Nursing home

A concern often raised by farming families is that farmland might have to be sold to pay for nursing care for the previous owner of the land. Brown maintained that health trusts can challenge the transfer of land if it is considered an attempt to avoid health care costs, but this scenario is not common.

“Most health trusts in NI appear to ignore any disposal of property made more than six months before nursing care is required,” Brown said.

Reducing tax by incorporating a farm business

More farmers in NI are considering changing the legal status of their farm business from a sole trader or partnership to a limited company to even out and reduce their tax bills.

Speaking at the meeting in Portrush, Denise Heaney from accountancy firm Cavanagh Kelly said that operating as a limited company can be suitable for profitable farm businesses.

At present, the 20% income tax rate for sole traders and partners is paid on taxable income between £11,501 and £45,000, with the 40% rate starting at £45,001 and 45% tax rate at £150,001.

With limited companies, corporation tax of 19% is paid on all profits. However, income tax also needs to be paid on salaries and dividends extracted from the company for personal use. “The tax savings from incorporating into a limited company can depend on how much you need to draw down to live on,” Heaney said.

“There is the possibility of the NI corporation tax rate going down to 12.5%, but this depends on an executive being up and running and making that decision, so it is extremely doubtful in the foreseeable future,” she added.

Limited companies must file accounts through Companies House and accountancy fees for companies tend to be more expensive than with sole traders or partnerships.

However, Heaney pointed out that limited companies have personal asset protection, whereas sole traders and partnerships do not. “This means your house could be at risk if you had a creditor who needed to be paid and the business didn’t have the funds,” she said.

Flexibility

She said that the main advantage of sole traders and partnerships is the flexibility of the arrangement. “You pay tax on profits and the remainder can be saved or drawn down and spent on whatever,” she said.

When a farm becomes a limited company, the farmer is usually the majority shareholder, but the company is a separate legal entity and money from profits belongs to the company until it is paid out in a salary or dividend.

Another point to consider is capital allowances for sole traders and partnerships. “Farmers that regularly invest money back into the business through purchasing machinery or equipment reduce their taxable income, and so becoming a limited company will probably be less advantageous,” Heaney said.

A third trading vehicle option is an unlimited company, where taxes are the same as a limited company, but accounts are not filed with Companies House and there is no personal protection.

Ultimately, the most appropriate tax vehicle is specific to each individual farm business. Options should be carefully considered with the advice of an accountant, concluded Heaney.