Prior to 6 April 2016 farmers were only able to average profits over 2 consecutive tax years. From 6 April, farmers will have a choice of averaging over 2 years or 5 years.
The introduction of this 5 year average period will be of great benefit to farmers whose profits can fluctuate considerably over a number of years. The two year average option would have been little help to a farmer who had had 3 good years where higher rate tax had been incurred, followed by 2 bad years.
Example – 2 year averaging claim
|Averaging Claim 14/15, 15/16||35,000||35,000|
|Averaging Claim 15/16, 16/17||22,500||22,500|
|Total Taxable Profits after all averaging claims||60,000||60,000||35,000||22,500||22,500|
If a 5 year averaging claim is applied the assessable profits become:
Depending on other income this 5 year claim has removed the liability to higher rate tax which would save about £12,000.
The ability to choose whether to average over 2 or 5 years gives scope for the farmer to plan the timing of capital expenditure if approaching the end of the fifth qualifying year. It may also be possible to utilise personal allowances which may otherwise be wasted.
The first opportunity to utilise the 5 year averaging rules will be in the year ended 5 April 2017. Profits muse be reviewed before the year end to ensure any planning opportunities can be under taken.
For more information contact Green & Co.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.