Commonly a farmhouse will perform a dual function, one as the administrative centre from which the farming operations are carried out on the land associated with the farmhouse, and the second as a domestic dwelling for the farmer. A portion of household running expenses such as light and heat, can therefore be deemed to be for business purposes and can be deducted in arriving at taxable profits.
It is also possible to reclaim the VAT on certain farmhouse repairs. HMRC’s policy for many years has been to allow a proportion of input VAT to be claimed on farmhouse-related expenditure. It is accepted that the farmhouse is an integral part of the farming business and as such – providing that the building is a typical working farmhouse, the business is a full time farming activity, and the work done is in the nature of general repair and maintenance of the farmhouse, up to 70% of the VAT incurred may be recovered.
These rules do not apply where the farming activity being carried on is not a full-time activity, or where the farmhouse is primarily a family home rather than a working farmhouse. It only applies to works of repair and maintenance and not to anything that is in the nature of an extension or improvement of the farmhouse.
It is important to only reclaim a portion of VAT and claim tax relief on only a portion of the total costs, as claiming 100% tax relief and input VAT on expenses could result in capital gains tax and inheritance tax being due on the transfer of your home. It is therefore important to ensure that what you do now won’t affect your entitlement to tax reliefs available on the transfer of your farm and farmhouse to future generations.
Preserving farming assets and wealth for the next generation is a major concern to farmers. Agriculture tends to be capital intensive, so considerations of business succession and capital tax planning (both inheritance tax and capital gains tax) may be vital. Advice should be sought on inheritance tax reliefs and capital gains tax on land and basic payments, ensuring that you preserve as much of your wealth within your family.
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