Taxing issues for the farmhouse

The farmhouse is the centre of most things in a working farm. At times it can be the office, home, canteen, workshop extension and boardroom. For an accountant it can be a complex area covering many different areas of tax. For farmers, understanding the different areas should help maximise savings and reduce tax where possible.

Income Tax

For sole traders and partnerships the running costs of the farmhouse will be an expense of the business.

These costs will normally be reflected in the annual accounts as expenditure or property improvements. A private use proportion of expenditure will be disallowed in the income tax computation.

There is no statutory percentage, although the commonly accepted basis is two-thirds private, one-third business. Different methods of apportionment can apply depending on circumstances, such as there being more than one farmhouse in a business.

VAT

Confusingly, the VAT treatment of expenditure on the farmhouse differs from Income Tax. Purchase or input VAT can be reclaimed on expenditure such as property repairs or improvement.

The maximum claim possible is 70% of the VAT. There is no set percentage and the level of reclaim should be calculated on a “just and reasonable basis”. For major renovations, expert help should be sought with a consistent and methodical approach used.

Annual Tax on Enveloped Dwelling

Farmhouses owned by limited companies or a mixed partnership that includes a corporate entity should consider if ATED applies to them.

This legislation was brought in to target wealthy foreign owners of UK residential property, but has resulted in a form-filling exercise for many. It is only farmhouses with a value at March 31 2017 greater than £500,000 that are caught.

A return must be completed claiming relief from ATED, however be careful of the rules. In certain circumstances, relief is not available, such as when the farmhouse is on separate title from the agricultural land.

Inheritance Tax

There are many tax cases and legislation concerning the farmhouse so a short article can only provide a few pointers.

Agricultural Property Relief (APR) is a relief from Inheritance Tax and assets qualifying will get either 100% or 50% relief. The loss of APR on an asset can mean Inheritance Tax is payable at 40% on the death of the owner.

One common APR restriction is if the farmhouse is not occupied for the purposes of agriculture at the point of gift or owner’s death.

Often changes are made with the best of intentions. For example, an elderly family member may retire from the partnership due to ill health, but continue to reside in the farmhouse. On the death of the owner, the farmhouse is not being used for the purpose of agriculture, so cannot qualify for APR.

Another concern is where the property owner leaves the farmhouse due to ill health. Where the farmhouse is empty for many months followed by the death of the owner, a claim for APR can be denied.

Additional Dwelling Supplement

The ownership of a farmhouse outright or even part-ownership through a partnership will be counted as a residence for the purpose of ADS.

Where an owner purchases a second dwelling costing more than £40,000, the ADS is applied. ADS is a 3% charge of the purchase price and is payable together with any Land and Business Transaction Tax due.

Capital Gains Tax

When a farmhouse is sold or gifted, Capital Gains Tax will apply. This is another complex area with lots of opportunities to tax plan and get it wrong. Where an owner has resided in the property, there is normally no Capital Gains Tax liability as the property would be their principal private residence.

It is more complex where the property is owned by a partnership, but occupied by only one partner.