Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help. Here, Lisa Oliver of Hazlewoods offers tax advice for those planning to build new houses.
We are a husband and wife farming partnership, with a farmyard that has planning potential for five new-build houses. All assets used by the partnership are included on the balance sheet.
We are considering whether we should sell the yard once planning has been obtained, or develop the plot ourselves and rent out the properties. What are the tax implications we need to consider?
Retaining the farmyard and renting out properties
As the farmyard is currently used by the farming business it will qualify for 100% Agricultural Property Relief (APR) from Inheritance Tax (IHT) on the agricultural value of the land and buildings.
The farmyard also has non-agricultural value – development potential – so should receive IHT relief through Business Property Relief (BPR) on this element, at 100%, as the asset is included on the partnership balance sheet.
See also: Be clear on farm asset ownership
If you build the houses and rent these out through the farming partnership, then provided the partnership is still predominantly a trading business, and the houses are partnership assets, they should qualify for BPR and would not be subject to IHT.
Another consideration is the recovery of input VAT on the build cost.
Rental income from residential properties is an exempt supply for VAT purposes. Renting out the houses would mean the partnership would become partially exempt, and consideration would need to be taken in terms of the input VAT recoverable on any of the build costs.
The simplest approach may be to use VAT-registered contractors to undertake the build work as this would be zero-rated as construction work on a new residential dwelling.
However, be aware that certain costs, for example materials purchased by yourself and professional fees cannot be included under the zero rating and this VAT will be an additional, potentially irrecoverable VAT cost if the partial exemption limits are breached.
Depending on who you want to benefit from the rental income, who should own the houses and how you plan to pay for the builds, it may be worth considering gifting the farmyard to the next generation while the farmyard is still used for agricultural purposes, as the gain on the transfer can be held over.
This would be a Potentially Exempt Transfer in terms of IHT, and provided the donor survives seven years this would fall out of their estate completely.
If the donor dies within seven years, there may be IHT implications.
Selling the farmyard with planning permission
If the farmyard is sold with planning permission then any gain on the sale would be subject to Capital Gains Tax (CGT).
Each individual has an annual exemption of £11,100 on which no tax would be paid, provided there have been no other capital gains in the year.
The standard rate of capital gains tax is now 20% other than for the sale of residential property, although some gains may be taxed at 10% if they fall within an individual’s basic rate tax band.
In order to defer the gain and reduce the tax payable on the sale, it would be possible to rollover the proceeds into the purchase of farmland, new farm buildings or other business assets, although all the proceeds would need to be reinvested in order to reduce the tax bill to nil.
Stamp Duty Land Tax would be payable on any property or land purchase.
The sale could qualify for Entrepreneurs Relief, which would reduce the rate of CGT on the total taxable gain to 10%.
The relief is only available for what are known as “qualifying business disposals” and it would be important to ensure that this was considered prior to the farmyard being sold as there would be some tax planning required.
If the proceeds from the sale are not reinvested in business assets, the cash would potentially form part of your taxable estate for IHT purposes and be subject to IHT at 40%.
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