If you raise animals for their products, you may be able to make a herd basis election which can result in tax benefits. This article discusses what the herd basis is, when you can elect for it, what the tax advantages are as well as pitfalls to look out for.
Farmers who own production animals such as beef, dairy or sheep may classify their animals differently in their accounts.
Under normal accounting rules animals are dealt with as trading stock. However, some farmers keep animals for production such as milk, eggs, youngstock or wool rather than for resale. HMRC gives the farmer an option to treat these as capital assets under the herd basis rules.
The farmer must elect for the herd basis within two years of the end of the first accounting period of the business, or a significant reconstitution of the business. The election is irrevocable and must be made in writing describing which herds they want to include.
Some examples of production animals that can be included in the election are as follows, although there are other types of production herds that can be included:
Non-production animals are excluded from the herd basis including:
We can advise on which herds are within the scope of herd basis and assist you with the election process.
The herd basis offers several tax advantages:
Cost deduction: Farmers can deduct the costs associated with maintaining the herd from their taxable income.
Tax-free profits: Any profit from the eventual disposal of the whole herd or a significant part of the herd without replacement is exempt from capital gains tax. The tax-free profit on disposal of the herd can represent a windfall for farmers. These profits are maximised by those with the lowest cost of production or purchase price for those animals joining the production herd, and by those farmers who hold on to their herd for a long time.
As an example, had a farmer done nothing more than maintain a herd of beef cattle for the past 30 years the value of the cows would have roughly doubled over this time due to inflation. If the farmer has made a herd basis election, half of the proceeds on a substantial disposal of the herd would be tax-free profit.
In an inflationary period, farmers can recognise this benefit more quickly as the value of their animals will rise with inflation whilst the cost stays the same.
In addition to the tax advantages, the herd basis offers farmers a stable herd value that makes year to year comparisons more straightforward ignoring the need for stock value adjustments on herd animals.
In most cases the herd basis will represent a tax benefit for farmers, however as it is an irrevocable decision it can also result in businesses being caught in an undesirable tax treatment.
As any gain made on the disposal of a herd is not taxable, any loss made cannot be utilised for tax purposes. Therefore, if a farmer who has made a herd basis election makes a loss, they will be unable to offset it against any trading profits or capital gains,
This can be particularly relevant when farmers are forced out of production by market conditions. A few years ago the bottom dropped out of the pig market, which meant pig farmers were making big losses either from continuing their business or on selling their herd. Those who felt they had no option but to sell were not able to claim the loss they made on their herd, meaning some farmers faced large tax bills on their worst farming year ever.
At Evelyn Partners we have the experts who can help. You can speak to your usual Evelyn Partners contact, book a free initial consultation online, or call 020 7189 2400.
Approval code: NTEH71124132
Our industry experts support families and trustees throughout critical periods in the life of a landed or rural estate.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2024/25.
Some of our Financial Services calls are recorded for regulatory and other purposes. Find out more about how we use your personal information in our privacy notice.
Please complete this form and let us know in ‘Your Comments’ below, which areas are of primary interest. One of our experts will then call you at a convenient time.
*Your personal data will be processed by Evelyn Partners to send you emails with News Events and services in accordance with our Privacy Policy. You can unsubscribe at any time.
Your form has been successfully submitted a member of our team will get back to you as soon as possible.
Ireland 
USA 
