Farming matters - Herd basis election
19th April 2016 by Nick Strawson
One of the many taxation options available to farmer or livestock breeder is the herd basis election.
The effect of the election is that mature animals of the herd are held as a capital asset valued at original cost and not as trading stock. As a consequence neither the initial cost of the herd nor the cost of any animals added to the herd (as distinct from replacements) is an allowable deduction from the profits of the trade. The net cost of replacing animals in the herd (but not any element of improvement) is an allowable deduction.
Where the herd is disposed of without replacement any profit or loss is not included in the computation of taxable profits.
The herd basis election can be very useful where prices are rising, as any uplift from original cost to eventual disposal proceeds will be tax free. Conversely, in a falling market any loss on the disposal of the herd will be non allowable.
The election is available on new herds and the election must be made within approximately two years of the end of the accounting year in which the herd was established. The time limit varies depending on the accounting date and trading structure of the entity. A herd basis election is available for sole traders, partnerships and limited companies. The election is irrevocable.
A separate election may be made for each class of animal. For example a dairy herd (producing milk) and a beef suckler herd (producing beef calves) would need to be treated independently, and indeed it might be decided to elect for the herd basis to apply to one and not to the other.
The herd election must be renewed if there is a change of partner. If it is not then the herd basis treatment ceases.
Conversely, a genuine change of partner provides a new opportunity for a herd election to be made on an established herd.
A disposal of the herd will occur:-
- If the herd, or a substantial proportion of the herd (over 20%), is sold.
- If there is a change of the herd’s purpose (e.g. dairy production ceases and the herd is converted to beef suckler production).
- If there is a change in the composition of a partnership and the election is not renewed.
If a herd is re -established within 5 years of the disposal then it will be treated as continuing, and any relief granted on an earlier disposal will be reversed.
There are special rules which come into play where a production herd is compulsorily slaughtered on account of disease and compensation is payable.
For further information on herd basis election please contact one of our agriculture specialists.
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