Hobby farms and tax: what you need to know
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A so-called "hobby farm" is generally understood to be a farm which is run for the pleasure of the owner, not with a view to realising a profit. While far from a new concept, we understand they have been increasing in popularity in recent years. Reasons for such increases are beyond the author’s expertise, so this article considers the tax implications of purchasing and running a hobby farm.
In common with many seemingly simple endeavours, the tax position of hobby farms can be surprisingly complex. A purchaser should obtain professional advice before purchasing such a property. What follows is a broad overview of some of the main tax considerations.
Tax on purchase:
SDLT is calculated by applying certain rates to the chargeable consideration. Rates for purchases of residential property can be up to 19%; for non-residential property, up to 5%. A purchaser should consider whether the property can be classified as “mixed use” and therefore subject to the non-residential rates. Mixed-use classification is regularly litigated and the assessment is multi-factorial and therefore highly subjective. Properly classifying the property as non-residential can result in significant savings, while incorrectly classifying it as non-residential can result in costly disputes with HMRC. Each case turns on its own facts. See our article on mixed-use for further information.
The price paid to purchase a dwelling is exempt from VAT, and any farmland would only be subject to VAT if the seller had “opted to tax” the land. If VAT is charged, it would usually be added to the purchase price for to the farmland. SDLT would be calculated on the VAT-inclusive amount (that is, tax on the tax).
Ongoing taxation:
As a hobby farm is usually not run with a view to realising a profit, there should be no net income to tax. That said, all farming is treated as a trade, regardless of whether there is commercial motivation, so any profits would be subject to income tax or corporation tax. There are specific restrictions on the use of losses of hobby farms, so losses cannot offset other forms of income.
If commercial activity is to be undertaken, the owner should consider the pros and cons of operating as a sole trader, in a partnership, or through a limited company.
The sporadic sale of surplus agricultural produce may be outside the scope of VAT if there is no organised business activity, but in any event the sale of many raw food products should be zero-rated.
The owner would also need to consider council tax and possibly business rates. The owner would need to consider whether council tax should properly apply to the part of the land that is used for hobby-farming. Agricultural land is exempt from business rates, but it would be important to consider whether the activities undertaken on the farm fall within the required definitions.
Tax on sale:
The land is likely to be held as an investment, so capital gains tax will be relevant on a sale by an individual. If a dwelling associated with the farm is the individual’s main residence, then principal private residence (PPR) relief may be available, but advice should be obtained to check that the entirety of the grounds and fields around the house qualify for relief. Gains in the value of the wider estate are likely to be taxable.
Inheritance tax:
Changes to agricultural property relief (APR) and business property relief (BPR) provide a tax-free allowance (£2.5m per person, which is transferrable between spouses) and any value above that allowance is taxed at an effective rate of 20%. A hobby farm is unlikely to benefit from BPR if there is no trade but, depending on the property, APR should be considered. Professional advice should be obtained.
