Residential property – A Mixed Bag
Many farming families own and operate residential property, both as employee accommodation, and third party lettings. The tax treatment of these two uses varies considerably and so it is worth recapping the key differences:
Income Tax:
- The provision of rent-free accommodation is an exempt benefit to an employee where it is provided for the better performance of their duties. The employer may also pay the council tax and rates within this exemption, but the provision of utilities paid for by the employer would be a taxable benefit. Repairs and maintenance costs are deductible against the trading profits.
- Income generated from properties let to third parties is taxed separately from the trading profits and is not subject to National Insurance Contributions. The expenses associated with the lettings are deducted from the rental income, rather than the farming trade. Losses arising from the rental property cannot be offset against trading profits (except where the business is subject to Corporation Tax) and must instead be carried forward against future rental profits.This could be particularly significant in years where significant repairs and maintenance costs are incurred.
VAT:
- Input VAT incurred on expenses relating to farm worker’s accommodation is recoverable through the business VAT return.
- Input VAT on expenses relating to property let to third parties through the farming business can only be recovered where the amounts fall within the partial exemption thresholds.
Capital Gains Tax:
Where a dwelling has been occupied by a farm worker throughout the period of ownership, a transferor is able to:
- Claim Business Asset Gift Relief (‘Holdover Relief’) on the gifting of the property to an individual, deferring the tax liability that would otherwise crystallise; and
- Claim Business Asset Disposal Relief, reducing the rate of tax on the disposal to 10% where the other requisite conditions are satisfied.
Claims for gift and disposal reliefs may only apply to let residential properties where they have qualified as Furnished Holiday Lets throughout the transferor’s period of ownership.
Inheritance Tax:
Where a dwelling has been occupied by an unconnected farm worker of the transferor’s farming trade throughout the two years preceding a transfer:
- The agricultural value benefits from 100% Agricultural Property Relief, where it is of a character appropriate to the farming business; and
- 100% Business Property Relief can be claimed on value in excess of agricultural value where the dwelling is held as an asset of the business.50% relief can be claimed where the dwelling is held personally and used by the owners’ partnership, or company in which they have a controlling interest.
Where the dwelling is let as part of the holding to a farming tenant, is of a character appropriate, and has been occupied for agricultural purposes throughout the seven years preceding a transfer:
- The agricultural value can benefit from 100% Agricultural Property Relief where the tenancy commenced after 1 September 1995; or
- 50% where the tenancy commenced prior to that date.
Let residential properties that are not occupied for agricultural purposes do not benefit from Agricultural Property Relief.Business Property Relief can sometimes be claimed on the value of let residential property held as part of a mainly trading business, under the principles of the Farmer and Balfour cases.
Food for thought:
It is not uncommon for multiple dwellings to be owned by different members of the family, some within and some outside of the business structure, and for those dwellings to be used for different purposes.
Where there are changes to the team, and workers vacate or move into property, such as following the sale of a dairy herd, or starting up a new enterprise, it is helpful to take stock of the new position from a tax perspective, to ensure that the relevant transactions are being accounted for correctly.
Similarly, as the family’s plans evolve, it is important to revisit the capital tax implications of how different dwellings are occupied. Often, the older generation may like to retain a let cottage to support them during retirement, albeit that the value can then be exposed to Inheritance Tax where the property is held outside of the trading business structure.Reorganising the ownership of assets as part of succession planning can also be impacted by how different dwellings are occupied.
As your business adapts to navigate the continual changes faced by the agricultural sector, take stock of how assets are being used differently and plan accordingly to optimise the position.
Dan Knight FCA CTA MCIArb
Director
Dan joined the practice in 2019 having previously worked for a regional firm culminating as Head of Rural Tax.
Having grown up on a dairy farm on the Dorset/Somerset border, Dan spent a number of years working in agriculture before becoming a Chartered Accountant and a Chartered Tax Adviser. Harnessing both his practical and professional experience, Dan has spent the last decade advising farming businesses across the region on a wide range of issues.
Passionate about his work, Dan specialises in succession planning and restructuring, helping farming families to implement change, accomplish their ambition and enhance the legacy for future generations.
Dan is a keen shot in the field or facing the trap and thoroughly
enjoys supporting his young son on the football field.