BIM55501 - Farming: overview of the herd basis

As a normal rule, farm animals are dealt with as trading stock (see BIM55425). However some farm animals - those which 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 - are in many ways more like capital assets of the farmer's business. Tax law recognises this by giving farmers the option of dealing with such `production animals' under the herd basis.

The herd basis provides a set of rules whereby a herd or flock of production animals is excluded from trading stock and treated, in most but not all circumstances, like a capital asset. These rules are summarised in BIM55505. 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.

A farmer must elect for the herd basis; otherwise the animals are treated as trading stock. The election, which is irrevocable, must specify the class of animals concerned. Normally it has to be made soon after the farmer first starts keeping animals of that class, and then the herd basis applies to those animals from the outset (see BIM55595 - BIM55605).