Most businesses use finance to support their day-to-day cash flow as well as for larger capital purchases, and our faming clients are no different. We typically see our clients using finance to fund new capital projects such as the purchase of additional land, renovation of farm buildings into a new rental business, or to help with the purchase of a new piece of kit.
The repayment of capital is not an allowable expense but interest payments and other finance costs can often be claimed. However, the treatment varies depending on the type of financing, and the person entering the arrangement.
This article considers the common scenarios in which finance is used and how tax relief can be obtained.
Types of financial arrangement
Simple loan or bank overdraft – provided the loan is used for the purposes of the trade, the interest incurred will be an allowable expense against trading income.
For residential rental businesses (including furnished holiday lets from April 2025) carried on by an individual or partnership, a deduction for mortgage interest is no longer allowable. Relief is instead received as a tax credit, restricted to 20% of the interest paid.
For commercial properties, and all letting carried on by a company, mortgage interest is an allowable expense.
Where there is private use, such as on the farmhouse, the allowable interest is restricted to reflect the business use.
Leasing – this can either be a financing lease, or an operating lease. A finance lease is where ownership of the asset is transferred to the lessee, whereas with an operating lease the ownership remains with the lessor.
In both cases, capital allowances cannot be claimed, and the lease cost is allowable for tax, restricted for any personal use made by individuals or partnerships. For finance lease the depreciation is also allowed.
Hire Purchase – a hire purchase agreement differs from a lease as at the end of the arrangement the asset is owned outright. Any interest paid on the agreement is a tax allowable expenses and capital allowances can be claimed on the cost of the asset.
Cars are often available through PCP arrangements. The treatment of these will be like a hire purchase arrangement but the availability of capital allowances will depend on the specifics of the arrangement.
Inheritance Tax (IHT)
The value of any outstanding loans on death are deductible from the value of the estate. However, care should be taken where an asset qualifying for IHT relief (agricultural property or business relief) e.g. farmland is purchased using a loan secured against an asset
on which no IHT relief is available e.g. let property. On death the value of the loan must be deducted from the farmland rather than the cottage it is secured against. This can lead to the value of taxable assets in your estate being higher than expected.
Conclusion
Tax relief is usually available for costs of financing, but this can vary depending on the type of arrangement, the purpose of the loan and who is entering into it.
Consideration of the potential IHT implications of financing should also be considered as it can have an impact on the value of the estate on death.
Often there is a conflict between the relief for the costs of finance against income and the relief for IHT. In diversified businesses the rates of relief against income can also vary.
If you are considering entering a finance arrangement, ensure you fully understand the tax implications of it and take advice before signing on the dotted line.
If you would like to discuss your options around finance, please contact our Farms and Estates team below.
