Submitted by Bill Fernie
20th October 2026
From income tax and capital gains to inheritance tax and the little-known herd basis, farming families have several rules to consider when planning for retirement and passing on the family business.
Farming is often described as a way of life rather than simply a business. Families can spend generations building up a farm, investing in land, livestock, machinery and buildings, only to discover that transferring what they have created to the next generation involves a complicated set of tax rules.
For farmers in Scotland, understanding those rules is becoming increasingly important. A farm may be worth a considerable amount on paper while producing a much more modest annual income. Much of its value can be tied up in land, buildings and livestock rather than cash readily available to pay bills or fund retirement.
The challenge is to ensure that a lifetime of work provides security for the retiring farmer while giving the next generation a realistic opportunity to continue the business.
The taxes farmers need to understand
The first tax most farmers encounter is income tax. A self-employed farmer generally pays tax on taxable profits rather than total sales, with allowable business expenses and other adjustments taken into account. National Insurance contributions may also be due.
Farm profits can fluctuate considerably from one year to the next because of weather, harvests, livestock prices and the cost of feed, fertiliser, fuel and machinery. Eligible farmers using the accruals basis of accounting can sometimes average profits over two or five years, helping to smooth the tax consequences of unusually good or poor years.
Capital gains tax can become important when land, buildings, shares or other assets are sold for more than their tax cost. The tax is generally charged on the gain rather than the entire sale price, although the final calculation depends on the circumstances and any available reliefs.
Inheritance tax is another major consideration when a farm is passed on after death or through certain lifetime arrangements. Changes to agricultural property relief and business property relief from April 2026 mean farming families should not assume that all qualifying agricultural or business assets will automatically receive unlimited relief. The detailed rules, allowances and eligibility conditions need to be checked against the family's circumstances.
VAT can also affect farming businesses. Some farmers use normal VAT registration, while eligible businesses may use the Agricultural Flat Rate Scheme. The appropriate arrangement depends on the nature and scale of the business.
These taxes do not all apply in the same way to every farm. The important point is that a decision made to reduce one tax bill can have consequences for another.
The herd basis: an unfamiliar but potentially important rule
One tax provision that may be unfamiliar outside farming is the herd basis. It remains part of HMRC's tax rules and can be relevant to farmers who keep qualifying livestock primarily for production, such as dairy cattle kept to produce milk.
Under the normal tax treatment, livestock is generally accounted for as trading stock. Under the herd basis, an elected production herd is treated differently for certain tax purposes.
In broad terms, the cost of establishing or expanding the elected herd is not normally deducted as an ordinary trading expense. The net cost of replacing animals in the herd can generally be deducted. Special rules also apply when the whole herd, or a substantial part of it, is sold and not replaced.
That last point is particularly relevant to retirement planning. A dairy farmer who has used the herd basis for many years may need to consider how the rules apply when the business ends and the herd is sold.
Under the relevant conditions, the proceeds from disposing of the herd without replacing it may be excluded from trading profits. This can be an important distinction when calculating the tax consequences of retirement.
However, the herd basis is not a general tax exemption for selling a farm. The land, buildings, machinery and other assets may have their own tax treatment. Nor does the herd basis automatically remove inheritance tax liabilities.
The election also has specific conditions and is generally irrevocable. Farmers cannot simply decide at retirement to adopt it retrospectively. Anyone who thinks it might be relevant should check the rules with a farming accountant or tax adviser.
Retirement is about more than selling the livestock
A farmer approaching retirement may have several choices. The business might be passed to a son or daughter, transferred gradually to the next generation, sold to another farmer or brought to an orderly end.
Each option can have different financial and tax consequences. A family member may want to take over but lack the money to buy out other relatives. The retiring farmer may want to release capital from the business while ensuring that a spouse or partner remains financially secure.
A farm can also be asset-rich but cash-poor. Selling land to fund retirement might generate a capital gains tax liability and could reduce the scale of the remaining business. Passing assets on may have different implications for inheritance tax, depending on the arrangements and whether the relevant reliefs apply.
These are not decisions that should be left until the farmer is ready to stop working. Planning early gives the family more time to compare options and avoid being forced into a sale or transfer at an inconvenient moment.
A will is only one part of the plan
A properly prepared will is essential, but it cannot replace a wider succession plan. Farmers should consider who will manage the business, how ownership will be transferred, what happens if the owner becomes seriously ill and how the retiring farmer will receive an income.
Company documents, partnership agreements, ownership records and powers of attorney may also be relevant. Family discussions can be just as important as the paperwork, particularly where several children have different expectations about the future of the farm.
The Scottish Government's Farm Advisory Service provides information on agricultural taxation and reliefs, while a solicitor and an accountant with farming experience can help apply the rules to individual circumstances.
Planning protects the next generation
For many farming families, the objective is not simply to minimise tax. It is to preserve a viable business, provide a secure retirement and pass on the farm in a way that is fair and sustainable.
The herd basis remains a specialised part of the tax system that may matter to some livestock farmers, but it is only one element of the wider picture. Income tax, capital gains tax, inheritance tax and VAT can all affect the business at different stages.
The lesson is straightforward: farmers should not wait until retirement is imminent, or until a family bereavement, to begin planning. Understanding the rules while there is still time to make decisions can help protect both the people who built the farm and those who hope to carry it forward.
HMRC guidance on the herd basis
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim55501?utm_source=chatgpt.com
Scottish Government's Farm Advisory Service.
https://www.fas.scot/
Tax rules can change, so readers should seek advice based on their own circumstances.