Erecting and refurbishing farm buildings will be more financially viable now that farmers can benefit from a new allowance announced in the Budget.
The new Structures and Buildings Allowance (SBA) – announced by chancellor Philip Hammond in the autumn Budget – is a big tax change which could make a significant difference to farm investment.
It allows farmers to offset 2% of the building cost against their Income Tax or Corporation Tax each year, for the next 50 years.
Alongside the increase in the Annual Investment Allowance to £1m a year, the SBA is the biggest thing to come out of the Budget for the farming industry.
Since the government abolished the Agricultural Buildings Allowance in 2011 there has been no tax relief available on new farm buildings.
The SBA applies to the erection or refurbishment of commercial buildings from 29 October 2018.
It covers commercial offices, storage and livestock buildings – whether for own use or rental - but not residential dwellings.
According to accountant Old Mill, the SBA represents an "exciting change". Rural tax specialist Catherine Vickery said the aim of it is to get farmers investing to stimulate business growth.
“It’s not a huge incentive, but it may be enough to tip the balance when people are assessing their infrastructure,” she said.
“The tax saving, combined with improved building efficiencies, could make it more financially viable to erect a new build or carry out extensive refurbishment.”
For example, a farmer looking at spending £100,000 on a new barn would be able to offset £2,000 a year against Income or Corporation Tax.
If paying tax at the highest rate of 47%, that would generate a tax saving of £940. They will most likely be borrowing money to finance the build, so can also offset the interest against tax.
Ms Vickery said: “If you’re paying interest at 2%, and therefore saving £1,880 a year in tax when combined with the SBA, it effectively means the building is costing you £120 a year, excluding capital repayments.”
However, there are some restrictions. Where contracts have been signed or work commenced before 29 October 2018, the SBA will not apply
There are anti-avoidance measures in place to prevent people trying to fabricate eligibility, but it may be possible to claim partial eligibility, where one contract has been signed covering the structure, but another is yet to be agreed for the concrete.
In future years, the SBA is likely to affect farm prices, as the allowance transfers over to the purchaser.
“However, the vendor should be aware that the base value of the building will reduce by the amount of allowance claimed, so the sale could generate a chargeable capital gain,” Ms Vickery added.
The SBA also applies to structures – including walls, bridges and tunnels - so may be useful when refurbishing or erecting stone walls, for example.
In addition, it covers the cost of necessary demolition and land alterations, but not the cost of the land or obtaining planning permissions.
When combined with the £1m Annual Investment Allowance – which gives 100% up-front tax relief on the purchase of eligible plant and machinery – now is a good time for farmers to be improving or replacing their buildings, Ms Vickery said.
