The abolition of milk quota on 31st March 2015 triggered a disposal for farmers who bought milk quota in previous years.
With no proceeds from the milk quota abolition, a taxable loss equal to the base cost of the quota is likely to arise. For sole traders and partnerships, the loss is treated as a capital loss, which can be offset against any capital gains made in the 2014/15 tax year, saving Capital Gains Tax. Any unrelieved losses can be carried forward and are available for offset against future gains.
The capital gains do not have to be farm related. For instance, if you hold shares and make a profit on the sale of them, the losses on the quota can be used to reduce the tax payable.
If you trade as a limited company, the tax treatment is different. For quota purchased before April 2002, it will be treated as a capital loss, which can only be offset against capital gains.
Any quota bought after April 2002 will be a trading loss. In this case, the loss can be offset against the total company profits in the year of the loss, carried back to offset against the total company profits in the previous 12 months, or carried forward to be set solely against farm trading profits in future years.
The losses can also be very valuable when succession planning, allowing chargeable assets to be gifted away without incurring large Capital Gains Tax bills, depending on the level of losses available.
With such large tax savings at stake, it is important that the correct base cost is used in the loss calculations. Whilst the base cost may seem fairly obvious, there are a number of factors which may mean that the base cost is not the price paid for the quota, such as:
- Where milk quota has been revalued on the death of a partner
- Where individuals have joined and/or left the partnership
- Where there have been universal reductions and/or additional allocations of milk quota
- Where previous capital gains have been rolled over into the purchase of milk quota
Clearly determining the base cost may well be a complex exercise, but could be hugely valuable in mitigating present or future tax liabilities.
If you would like further information on the above post or to discuss your own specific circumstances, please feel free to talk to us on 01763 247321 or contact us via our webform.
This blog was written by Nick Jenkins.