Are you actually Farming?


Karen Wilson

Karen Wilson

Business Advisory Manager


This may seem like a strange question, especially for someone who has lived and worked on the same farm for most of their life. However, where a farmer has perhaps sold off their stock and has rented out their grass to their neighbour, HMRC may argue that you are no longer actively farming. 

A claim was recently disallowed by HMRC, where a landowner who was letting land under a grazing let arrangement, claimed reliefs for Capital Gains Tax (CGT) purposes on the sale of this area of land. Essentially this case meant that the landowner may have to pay CGT on an investment asset at double the rate of selling a business asset.

Ultimately the difference between whether the land is an investment asset or a business asset depends on who is carrying out the acts of husbandry on the land.

Where the landowner fertilises the land, arranges the supply of water to the land, controls weeds and reseeds the grass if necessary, then they should be classed as the farmer. This would mean that the grazier is merely being allowed to bring animals to the land to eat the grass.

If the grazier carries out the acts of husbandry on the land, then they will be deemed to be the farmer and the landowner would simply be holding the land as an investment asset.

In the case mentioned earlier the Landowner was responsible for applying the fertiliser and carrying out the other acts of husbandry including draining, fencing and tidying hedges, and the tribunal agreed that CGT should be payable at the lower rate (i.e. JHMRC’s view was overturned).

There are other tax advantages which arise from continuing to be an active farmer.

Agricultural land which is rented out may still qualify for 100% Inheritance Tax relief. However, in order for the farmhouse to qualify, it is necessary that the person living in the house is a working farmer. This will be difficult to prove if the grazier is carrying out all the acts of husbandry.

For VAT purposes there is a difference between the receipt of rent (normally exempt from VAT) and the provision of a grazing licence (zero rated for animal feedstuffs). A business making zero rated supplies can reclaim VAT on related expenses, whereas a business making exempt supplies cannot reclaim VAT at all.

For Income Tax purposes there are a number of disadvantages from being classed as a non-farmer. These include not being able to offset as many expenses, restrictions on the offset of losses and the inability to claim farmers averaging.

For an active farmer who wishes to give up their trade of farming, by disposing of the business, they may qualify for a lower rate of CGT, known as entrepreneur’s relief of 10%. To qualify for the lower rate of CGT on the whole gain, you would require to be actively farming the land at the time of the sale. This lower rate is not available on the disposal of investment assets.

As always with tax, it’s never straightforward so please speak to your accountant. Get in touch with me Karen Wilson at: karen.wilson@jcca.co.uk or your usual Johnston Carmichael advisor for advice to ensure that you are actually farming!