There seems to be many reasons at present, perhaps even more than usual, to feel a bit down. These include uncertainties caused by the Brexit debate, low commodity prices, growing bureaucracy, the impact of land reform political interference in our lives generally. As well as of course the perennial weather which seems to get more volatile and extreme. We believe there is still room for optimism and can think of at least six reasons to be cheerful:
1: New Averaging Rules for Tax Purposes
6 April 2016 has seen the introduction of the choice between 2 and 5 year averaging of profits for tax purposes. There has also been some simplification of the background rules. Although for most farmers 2 year averaging works fairly effectively, there will no doubt be other occasions when 5 year averaging could work extremely well to your advantage. This is particularly likely to be so in the first year of operation when profits are averaged for the first time.
2: Pension Reform
Recent pension reforms which came in over the last 2 years are really quite “game changing”. Whilst there has been some negatives such as reductions in lifetime allowance and restrictions on contributions, higher rate tax relief has for the moment remained. The ability to pass on appropriately “nominated” funds tax free before 75 and in an ongoing tax sheltered fund after 75 with flexibility for nominees as to how and when they take benefits are game changing. Inheritance tax and other charges on death have gone and pension schemes in many ways can now be regarded as a multi generation tax sheltered wealth fund. It is important that these are reviewed to ensure the new rules are understood and existing schemes can meet with them and overall investment strategies and performance is suited for your circumstances. You would not buy a field full of cattle and ignore them for 20 years. In the same way regular review and attention should be paid to pension arrangements.
3: Tax Shelters
There has rightly been much attention of recent on the use of offshore tax shelters and some of the more aggressive tax avoidance arrangements made by multi nationals and those seeking to avoid their tax obligations all together. There remain however a number of useful legitimate planning techniques and vehicles that can be used by family businesses as part of both their business structure and overall wealth and asset management. These include companies where tax rates are dropping. Trusts still have a very useful part to play allowing control of assets, control of tax exposure and can be utilised very effectively in some circumstances to pass on assets without capital gains tax, test business property relief positions and support grandchildren’s education. Investment and insurance based products such as Discounted Gift Schemes and Reversionary Interest Trust also continue to be allowed and can be very useful in helping to reduce longer term inheritance tax exposure whilst still retaining the ability to access some income or cash from the underlying capital.
Many farm businesses have diversified. When we went into the general recession back in 2007, agriculture actually continued having a fairly strong period of performance. Unlike many businesses the industry found it still relatively easy to borrow and to borrow at low cost. There have been perhaps unprecedented opportunities to diversify businesses. Either developing specialist contracting work with one piece of specialist equipment or broader contracting businesses. Renewables particularly in their early days provided some very useful returns on capital and diversification. Surplus property has also been recognised as a useful profit centre in its own right independent of farming activities. Some have diversified on much larger scale into tourism and non-agricultural activities. We have preached to our clients for a long time that “a stool with many legs is more stable” and whilst one needs to be careful not to get distracted by trying to do too many things, those who have managed to diversify effectively over the last ten or more years should be taking some comfort from a more robust and diverse income base in their business.
5: End of China’s One Child Only Policy
On 1 January 2016, China ended its controversial one child policy. To date China has been remarkably effective in keeping up its own production in line with its population growth, despite an emergence in demand for all sorts of goods and services. It will remain to be seen what effect an increased rate of population growth will have in the longer term on China’s import of agricultural products.
6: Poor Prices? – Then try something else
It is useful to remember that we don’t have to grow crops or buy seasonal stock every year just because ‘it’s aye been’, especially if a return is unlikely. It may be wise to allow arable land to lie fallow and decide to put the capital into something else instead – even Premium Bonds during the normal production cycle. At least you would have some return then and if you are really lucky possibly even a £1,000,000! That really would open up new opportunities in the way that a crop which barely covers its costs will never.
Finally if you cannot help yourself from establishing crops, as they are not potentially going to be worth much anyway, perhaps now is the time to give your creative side some licence and try out some field art!