Farming tax strategy – the herd basis

Farm animals are usually dealt with for tax purposes as trading stock: the costs of animals are deducted from monies received when the animals are sold and any resultant profit taxed as income.

However, farmers can elect to treat qualifying “herds” of animals in a more tax efficient way, they can apply the Herd Basis (HB).

HMRC advise:

“Some farm animals are kept by farmers not primarily for resale but for the sake of the products (for example, milk or eggs) or offspring (for example, lambs or piglets) which they produce. These are in many ways more like the farmer’s capital assets. Tax law recognises this by giving farmers the option of dealing with such `production animals' under the herd basis.”

From the farmer's point of view, the main benefits are likely to be that:

  • the cost of maintaining the herd can be charged against tax, and
  • any profit on its eventual disposal will be tax-free.

Once an election to adopt HB is applied it cannot be revoked and farmers who make an HB election cannot calculate profits using the cash basis.

If an election is made basic rules apply. In summary they are:

  • The initial cost of the herd is not an allowable deduction, nor is the cost of any subsequent increase in herd size.
  • The net cost of replacing animals in the herd is an allowable deduction.
  • Where the odd animal, or just a few animals, are sold from the herd and not replaced, the resulting profit or loss is taken into account in arriving at the farming profits.
  • Where the whole herd, or a substantial part of the herd, is sold and not replaced, the resulting profit or loss is not taken into account.

The last point covers the major tax advantage. Effectively, any profit made when a herd is sold is tax free. Without a HB election this profit would be taxable.

The legislation, although expressed in terms of farmers, applies to any person who keeps a production herd for the purposes of a trade even though that trade may not be farming. Accordingly, the herd basis also applies, with necessary adaptations, to animal or fish breeding.

Not all production herds are covered by this election. Farmers are advised to seek advice to see if this would be a strategy they could employ and, of course, we would be delighted to do this for you.