The current value of farms is high despite low profits and uncertainty. At the time of writing, demand for farms exceeds supply and there are a larger number of buyers who are new to farming coming into the market. Purchasing a farm can give rise to many tax reliefs and it is essential that these are maximised from every perspective and be tailor-made to the buyer. Capital allowances planning is often overlooked or even dismissed as too tedious.
SDLT, CGT and IHT
First entitlement to capital allowances
These are situations where the purchaser is the first person to be “entitled” to claim capital allowances. The pooling and fixed value requirements apply to assets only on which the vendor was entitled to claim allowances. For various reasons, it may be that the purchaser of the farm is the first entity with entitlement to claim on the asset. This could be where, for example, the vendor has failed to claim capital allowances on assets previously. It is essential for the tax adviser to the purchaser to obtain the full history of capital allowances so that maximisation of tax relief can be considered. In such cases, the purchaser may allocate a portion of the purchase price towards the asset. Every asset transferred is considered individually so it is entirely possible that some assets in the property must be transferred by a section 198 election or be lost, and others may be claimed by the purchaser without interaction with the vendor or a section 198 election.
When considering first entitlement to claim on an eligible asset, it is important to forensically analyse the asset’s full history and the entitlement of each previous owner – not just the vendor. In practice, this can make an entitlement exercise more challenging for properties that have changed hands several times, or in the practical position of farms having very complex assets. In cases of obtaining a leasehold interest, it is necessary to consider the freeholder’s historic entitlement to the assets (if any) as first entitlement may lie with them.
Examples include companies that are not chargeable to corporation tax and therefore have no entitlement or use for capital allowances. When buying the asset from such a vendor, first entitlement to all the plant and machinery fixtures within the property lies with the purchaser, assuming no owners previous to the vendor would have been entitled to claim on the assets. This will typically result in the broadest form of purchase claim, and a detailed costing exercise is often required. However, this is something farmers are very reluctant to be involved with.
Such entities typically involved in property transactions include charities and pension funds which are not eligible. This would be where the farm was originally owned by a charity or pension.
Some farms are bought from developers possibly selling off a surplus. A developer is likely to hold the property as stock and the expenditure incurred on the development will not be capitalised. A purchaser obtaining a new property from a developer will possibly have first entitlement to claim capital allowances on the plant and machinery fixtures within.
Vendor has first entitlement
Integral feature uplifts
Many farms contain a potential high value of ‘integral features’. Capital allowances legislation allocates a range of assets into various pools which are ever evolving. One such change, which still affects property transactions today, was the introduction of the integral features legislation in 2008.
The special rate pool was introduced in 2008 and offered writing down allowances at a lower rate – 8%, since reduced to 6% – intended for assets that would typically deliver value to a business’s trade for a longer period of time than main pool assets, which offer writing down allowances at 18%. For example, the heating system of a commercial farm property – attracting the new lower rate of deductions – would be expected to last longer than computer equipment which remains a main pool asset.
Assets to be covered by the new integral features rules were either previously eligible for main pool allowances, or non-qualifying. For assets that had changed from non-qualifying to special rate assets, provisions were put in place so that the allowances could not be claimed until the asset was purchased by a new owner. This was presumably to prevent a surge of new claims from nearly every business in the country in 2008.
The result of all of the above is that a purchaser of a farm will have first entitlement to the integral features in the property that were non-qualifying before 2008 (known as post-commencement integral features), where the vendor owned the property before 2008.
These claims, known as integral feature uplifts, can often identify up to 15% of the purchase price as qualifying for special rate pool allowances.
Connected parties, section 198 and integral feature uplifts
Many farming transactions including “buying a farm” involve “connected parties”. If the vendor and purchaser of a property are connected, allowances may be pooled by the vendor and transferred to the purchaser as normal, through a section 198 election. However, the integral features uplift set out above would not be available, as the opportunity to claim on the first transaction after 2008 does not apply to connected party transactions. Typically, connected party purchasers are entitled to the same allowances as the connected vendor.
Annual Investment Allowance (AIA) is also restricted for purchases between connected parties.
Structures and buildings allowances
Expenditure incurred on the structure of the building, rather than the plant and machinery within it, may qualify for structures and buildings allowances (SBAs). Deductions of 3% of the total expenditure arise a year, more than 33 years from the date the building/asset is brought into use. Many would argue that this is a very low rate of relief compared to say AIA which has applied to buildings in the case of May (the grain store) and Griffiths (the temporary potato storage). However, not all buildings will qualify and therefore the SBA must be given consideration.
The definition of a structure is fairly broad and is defined as anything that ‘has been erected or constructed and is distinct from the earth surrounding it.’ Such a definition will capture all the structural elements of a building, but also hard landscaping works such as car parks and pavements. Notably, SBAs are not available on land purchases, legal fees and soft landscaping.
Some additional entitlement restrictions should be considered. SBAs are available only where the contract for physical works was agreed after 29 October 2018 – when SBAs were introduced – and are not available on plant and machinery expenditure. A claim for SBAs also needs to be accompanied by an allowances statement which will include some details of the claim that allow the SBAs pool to pass between a seller and a purchaser if the building is sold.
One key but often underappreciated limitation of SBAs is that the relief obtained will affect the base cost for capital gains purposes, so that the relief may be clawed back if the building is sold. No other capital allowances have a similar claw back. This, in combination with the small annual deduction rate of 3%, means that SBAs are often less of a priority when compared to more generous allowances. See the section on R&D allowances when buildings are involved.
Although the AIA level of £1 million is scheduled to drop to its base level of £200,000 in April 2023, the recent Spring Statement included a set of potential future changes to the capital allowances regime, including permanently increasing the base level of the allowance to £500,000. The autumn Budget 2022 should confirm if this or any similar proposals are going ahead.
Each year, up to £1 million of plant and machinery expenditure may be claimed under the annual investment allowance (AIA). So the relief will arise as a 100% first year allowance instead of attracting writing down allowances over time at 18% or 6%.
The AIA is shared between companies in a group or under common control, so often some consideration is required to establish where the allowance is best applied. Where plant and machinery exceeds £1 million in a financial year, the AIA should be used against special rate expenditure in the first instance, as it otherwise offers the slowest relief.
Like all first-year allowances, the AIA must be claimed in the year that the expenditure was originally incurred, meaning an effective time limit of two years from the end of the accounting period where the expenditure was incurred to make a claim.
Super deductions (SD)
The SD was introduced in the March 2021 Budget to encourage capital investment and economic recovery, super deductions offer a significant acceleration of allowances.
Available only to companies, the super deduction offers 130% first year relief for main pool plant and machinery. This not only accelerates all the spend into the first year (rather than over time) but also enhances the deduction by 30%.
Super deductions are also available for special rate expenditure as a 50% first year allowance. The remaining 50% of the spend will offer relief over time, at the usual 6% writing down allowance. Optimally, the taxpayer would still want to apply the AIA to this special rate expenditure, where available, to obtain as much relief as possible in the first year.
There are a few restrictions and considerations when claiming the super deduction. The assets must be new and purchased between 1 April 2021 and 31 March 2023. Cars are not eligible for the relief. Where the expenditure is part of a building project, the contract for the works must have been agreed after 3 March 2021. There are also clawback mechanics in place for when the assets are sold, so it may be necessary to track what assets have been part of a super deduction claim.
The Chancellor has stated that its very likely that the super deduction will be extended past April 2023. However, one or more of the aforementioned proposals from the Spring Statement is likely to replace it to some degree.
When buying a farm there is the potential ability to claim R&D relief on activities on the new farm. Research and development (R&D) allowances (RDAs) offer a 100% first year allowance for capitalised expenditure incurred on carrying out qualifying research and development (R&D), or more commonly, providing facilities to be used for R&D. This can include purchasing, constructing, refurbishing or otherwise improving a building, so long as it will be – wholly or partially – used for qualifying R&D activities. On the surface this may seem like the AIA with more conditions, however RDAs are not limited to plant and machinery expenditure. The rest of the building may also qualify for the relief. As a result, expenditure that would otherwise qualify only for 3% annual deductions through the SBA, or not qualify at all, may be fully deductible in the first year through RDAs.
The definition of qualifying R&D is the same as the definition for R&D tax credits so, for entities already claiming R&D tax relief, the RDAs may be a further key uplift. The R&D tax credit (for revenue expenditure) and RDAs (for capital expenditure) do not hinder each other. Both can be claimed on the relevant spend. When buildings are partially used for R&D, RDAs would only be claimed on the areas where R&D is undertaken. Any subsequent change in use of the building will not trigger any kind of clawback of this relief.
Many changes have already been announced for the R&D tax credits, and more are likely to come. Time will tell if the government’s current focus on innovation relief will also affect RDAs in some form.
Land remediation relief
A “niche” but lucrative tax relief, land remediation relief (LRR) offers 150% first year deduction for expenditure incurred on safely disposing of contaminants in the land, or otherwise remediating dangerous land. Typically, this includes dealing with asbestos, radon, Japanese knotweed, unstable ground and industrial waste. Such relief is therefore very relevant to the farmer and also extremely relevant to the purchaser of a farm.
The 150% deduction is for capital expenditure and applies to spend that typically might be eligible for slow (or no) relief. However, relief is also offered where the expenditure would be a revenue cost hitting the profit and loss, such as for a house builder. Here an additional 50% of the original deduction hitting the profits and loss can be claimed, thus maintaining the effective 150% relief on the expenditure incurred.
Land remediation relief is subject to the polluter pays principle, so the entity cannot claim the relief for disposing of contaminants that they (or anyone connected to them) caused or introduced to the land. The searches by the purchaser might throw up such problems and it is essential to use a specialist.
Supplied by Julie Butler FCA – Founding Director and Jennie Helm CTA – Tax Senior of Butler & Co Alresford Limited, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH. Tel: 01962 735 544. Email: firstname.lastname@example.org, email@example.com. Website: www.butler-co.co.uk.
Julie Butler FCA is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, Butler’s Equine Tax Planning (3rd Edition) (Law Brief Publishing) and Stanley: Taxation of Farmers and Landowners (LexisNexis), and editor of Farm Tax Brief.*The views expressed are the author's and not ICAEW's.