Paying taxes for the 2022-23 tax year has been difficult for many, with the high profits achieved in 2023 and then commodity prices dropping towards the end of 2023 into 2024 causing cashflow to be tricky. With the end of the tax year fast approaching, now is a good time to stop and reflect on your tax position, to work out if you can make use of any tax planning opportunities, whether this is available to you, your family, or your business.

Profits in farming are volatile, and inflation has been the highest we have known it for several years. Prices are uncertain for both commodities and services, which can make planning difficult. Below I look at opportunities and reliefs available to you and your business which may assist you during this particularly uncertain period.

Business profits

We saw strong farm profits in the 2022/23 year but anticipate 2023/24 farm profits to be lower, with grain and milk prices down and input costs up. Each business is of course unique and understanding your business profits for the year to date is essential before making any decisions that may alter your overall tax position for the year, and potentially for future years.

Even in a lean year, with manageable tax payments or even tax losses, there are still opportunities available. It may, for example, provide an opportune time to tax efficiently cash in some capital investments or make substantial taxable withdrawals from a pension pot. A poor year can also be used to your advantage for timing changing in tractors and machinery to maximise Capital Allowances claims for unincorporated businesses.

For example, on replacing a tractor, the disposal value of the old tractor will be taxable income for the business, whilst the cost of the new tractor should be eligible for full tax relief. Where the replacement takes place in the same tax year, the ‘cost to change’ is effectively tax deductible. It can however be helpful to structure the transactions such that the disposal takes place in a year of poor farm profits whilst the purchase takes place in a stronger year, by allowing the disposal proceeds for the old tractor to utilise Personal Allowances in the poor year rather than further add to taxable profits in a strong year.

Businesses anticipating strong taxable profits should consider whether it would be helpful for cashflow to bring forward planned plant and machinery expenditure to allow for a Capital Allowances claim in the current year.

The table below summarises the current Capital Allowances regime:

Companies – ‘Full Expensing’

For two years, companies enjoyed the 130% ‘Super Deduction’ to soften the increase in the main Corporation Tax rate to 25% from 1 April 2023. The Super Deduction ceased on 31 March 2023, but in the Autumn Statement, the Chancellor confirmed that ‘Full Expensing’ is to be a permanent feature for companies. Whilst the £1m Annual Investment Allowance continues to apply, it is capped at £1m whilst Full Expensing is unlimited so is valuable for large businesses with a significant annual spend on qualifying plant and machinery. As always, there are conditions to satisfy to benefit from Full Expensing, an important one being that the plant and machinery is new and unused. Relief is not available for second hand items, even if only used for testing, delivery, or demonstration.

Unincorporated business profits – Farmers’ Averaging

Unincorporated business profits are taxed on the individuals involved, at their marginal rates. Farming businesses can potentially take advantage of Farmers’ Averaging, which is restricted to farming profits only, and spreads these profits over two or five years, with the intention of smoothing the peaks and troughs of tax payment cashflow, and in some cases even generating a refund.

Unincorporated business profits – non 31 March/5 April year ends

Businesses with an accounting year end that does not already fall between 31 March and 5 April, will be impacted by the Government’s changes to the basis period rules which have been introduced to support Making Tax Digital.

From 2024/25, individuals will be taxed on their business profits arising within the tax year, regardless of their accounting year end. Where the business’s accounting date does not fall between 31 March and 5 April, profits will need to be time apportioned between the relevant tax years. For example, in the 2024/25 tax year, a sole trader with a 30 September year end would be taxable on half of the profits for the year ended 30 September 2024 and half of the profits for the following year.

To ease the transition to the new regime, in 2023/24 businesses will be assessed on the profits from the 12 months from the end of their last basis period ending in 2022/23, plus a ‘transition’ period running from the end of that period to 5 April 2024. The transition profits will be automatically spread over a period of five years, unless the taxpayer chooses to accelerate the tax payment, which may be beneficial in the context of their wider affairs. Any overlap profits brought forward will be fully relieved in 2023/24, leaving a clean slate for the new tax year regime. No overlap profits can be generated in the future.

If your business does not currently have an accounting date between 31 March and 5 April, it will be important to review your position and consider whether it would be beneficial to change your accounting date to make calculating taxable profit each year more straightforward.

Income Tax Planning

Having understood your business profits for the year, it is important to consider your total income for the tax year, including any rental income, interest, dividends, etc.

For those with companies, you may receive a salary and/or dividends. Salaries are tax deductible for the company but, are subject to National Insurance Contributions (NICs) for the individual and the company, and Income Tax at the individual’s marginal rate of tax. Dividends, although not tax deductible for the company, are not subject to NICs and suffer Income Tax at lower rates than employment income. The tax-free dividend allowance for 2023/24 is £1,000, which reduces to £500 from April 2024. Dividends falling within the basic rate tax band are subject to tax at 8.75%, whilst those within the higher rate are taxed at 33.75%. Dividends breaching the additional rate threshold are taxed at 39.35%.

Extracting profits tax-efficiently often requires a combination of salary and dividends but can also include pensions contributions and rent charges. Understanding your individual circumstances and personal income for the year to date will help to determine whether it is beneficial to make any further extraction of profits from your company, and in which form, before 5 April.

Where your total income from all sources breaches the 40% higher rate tax threshold of £50,270, or the 45% additional rate threshold of £125,140, it would be worth exploring making pension contributions to extend the basic rate and higher rate tax bands to reduce your Income Tax liability.

It can also be useful to consider the income of family members when reviewing your Income Tax position. Each individual has a Personal Allowance, currently £12,570 per individual. Where an individual is not fully utilising their Personal Allowance, it is possible to utilise the Marriage Allowance and transfer 10% of the Personal Allowance to the spouse, allowing a tax saving of up to £252 per year.

There can also be the opportunity to reorganise your affairs to transfer income to your spouse where it is reasonable to do so. For example, by transferring income-producing assets, such as rental properties, to your spouse, or updating partnership profit sharing ratios. Such changes should however always be considered alongside the bigger picture. Changing things for short term Income Tax savings could have the potential for disrupting long term matters such as capital tax reliefs and retirement income.

Capital Gains Tax

Disposals of capital assets are taxed alongside your income and are reportable on your tax return. From 6 April 2023 the amount of capital gains you can make tax free is £6,000 and this is reducing to £3,000 from 6 April 2024.

Where you are married, it is possible to transfer assets between you and your spouse on a no gain/no loss basis. On a subsequent sale, this can utilise both of your tax free Annual Exempt amounts, although there could be potential for challenge by HMRC where a transfer into joint names is immediately followed by a sale.

Transferring assets may also be advantageous allowing access to part of the capital gain being taxed at a lower rate of tax at 10% if a spouse is a basic rate tax payer as opposed to 20% tax for a higher rate tax payer. Residential property gains are taxed at either 18% or 28% depending on your level of other income, so it is worth considering the timing of these disposals to make use of the lower rates where possible.

Please do be aware if you are disposing of a residential property, you will need to report the disposal to HM Revenue and Customs and pay the tax within 60 days of the day of completion.

Inheritance Tax

Inheritance tax planning needs to have much more consideration to take advantage of planning opportunities for minimising Inheritance Tax on your estate, we are very happy to assist you with your needs. If you wish to make smaller gifts annually, you may be able to make the most of the following reliefs: -

• Gifts between spouses or civil partners are tax-free
• Annual Exemption £3,000 of gifts to anyone
• £250 small gifts allowance to anyone who has not benefited from your Annual Exemption
• £5,000 marriage gift allowance for gifts to your children, £2,500 for grandchildren and £1,000 for anyone else.

Conclusion

Taking advantage of reviewing your affairs pre tax year-end 5 April 2024 gives the best possibility for tax efficiency, however it should not always be left to the last minute at the end of the financial year but under constant review throughout.

Written by Rosie Bennett FCCA

Rosie Bennett FCCA

Manager

Rosie joined Evolution ABS in 2012 and became ACCA qualified in July 2017 and has been a client manager for 4 years.

When Rosie isn’t working, she is very active within Young Farmers and is currently the National Federation of Young Farmers Ex-Officio chairman so remains on the board of management to assist with the high-level running of the organisation.

She also enjoys showing Holstein Dairy Cattle, helping her parents on their dairy and poultry farm and cycling.

T: 01823 462908

E: Rosie.Bennett@evolutionabs.co.uk