When does section 122 of the Income Tax (Trading and Other Income) Act 2005 apply?

Section 122 applies when a substantial part of a farming herd is sold, either all at once or over no more than 12 months, and the farmer begins acquiring replacement animals within five years of the sale. Both conditions must be met for the section to govern the tax treatment of the transaction.

How are sale proceeds treated for replaced animals under section 122?

Where animals are replaced, the normal herd basis replacement rules apply. However, the sale proceeds of each animal sold are not recognised as a taxable receipt until the replacement animal is actually acquired. This effectively defers the tax charge until the replacement purchase takes place, with the cost of the new animal allowed as a deduction.

What happens to animals that are sold but never replaced under section 122?

If some animals included in the part sold are ultimately not replaced, any profit from their sale is not brought into account as a taxable receipt and no deduction is allowed for any loss. These unreplaced animals effectively drop out of the herd basis calculation entirely, meaning neither gains nor losses are recognised.

Is there a special rule under section 122 where the sale was forced by circumstances beyond the farmer's control?

Yes, different rules apply where the sale of a substantial part of the herd was forced by circumstances outside the farmer's control, such as a compulsory slaughter order. In those cases, the standard timing and recognition rules of section 122 are modified to reflect the involuntary nature of the disposal.

Income Tax (Trading and Other Income) Act 2005 section 122

Replacement of part sold begun within 5 years of sale

Section 122 deals with the tax treatment when a farmer sells a substantial part of a herd and begins replacing the animals within five years of the sale.

The section applies where a substantial part of a herd is sold (either all at once or over no more than 12 months) and the farmer begins acquiring replacement animals within 5 years
Where animals are replaced, the herd basis replacement rules apply — but sale proceeds of a sold animal are not recognised as a receipt until its replacement is actually acquired
Different rules apply if the sale was for reasons outside the farmer's control
Where some of the animals sold are not replaced, any profit on their sale is not treated as a receipt and no deduction is allowed for any loss

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