Business Clinic: Tax implications of bringing sons into farm partnership

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help. In this article, Peter Griffiths looks at how the tax status of a farm alters how children can be brought in to the partnership. 

Q My wife and I farm in partnership on an owner-occupied farm. We would like to bring our three sons into partnership, including transferring an interest in the land and buildings.  Can this be done without incurring any taxes?

A It should be possible to bring your sons into the partnership and transfer to them part of the land and buildings without giving rise to a tax charge, provided the land and buildings have always been used in your trading business.  There are various formalities that will need to be addressed.

See also: Tax considerations for farm cottages

The first step is to establish whether the farm is regarded as a partnership asset. In simple terms if it is not included in the partnership balance sheet then it is unlikely to be regarded as a partnership asset.

If it is not a partnership asset, then there is a free choice as to when you transfer an interest to your sons.

If a partnership asset, the farm will be part of the partnership capital for you and your wife. It is then possible to bring your sons in as partners with or without transferring to them an interest in the existing partnership capital.

Peter Griffiths, tax director, Hazlewoods

If the farm is part of the partnership capital and you transfer an interest in the capital to your sons when they become partners, this will mean a disposal for capital gains tax (CGT) purposes.

You and your wife will be regarded as “connected” with your sons for CGT purposes. This means that the value of any assets chargeable to CGT that you transfer to them will be treated as a disposal at market value.

For example, assume that the land being farmed is worth £1m, cost £200,000 and is owned jointly by yourself and your wife.

If you transfer a 10% interest in the land to each of your sons for tax purposes this means that you and your wife have each transferred a 5% interest to each of your sons and therefore given away 15% of the land.

This means that each of you will have a potential capital gain of £120,000 ((£1m-£200,000) x 15%), which could result in a CGT liability of approximately £24,000 each.

However, as the land is used in the farming business, it is potentially eligible for what is known as gift relief for CGT. 

You and your wife will each have to enter into a joint election with each of your sons so that no capital gain arises on this gift, but is held over until a future sale of the land.

This effectively means that your sons will take on your base cost and agree to pick up any tax liability that arises on a future transfer.

If the land is held by your sons until their death, then the capital gain will “washout” and will never become chargeable to CGT.

This is because CGT is not chargeable on death, when all assets are uplifted to market value.

Therefore, if the value of the land is eligible for agricultural property relief at death, or business property relief if there is development potential, then your sons can pass the land to the next generation with no inheritance tax or CGT arising.

If the land and buildings have not always been used in the partnership trade, for example it has been rented out for a period, then not all of the capital gain will be eligible for gift relief, meaning that CGT could arise on a transfer to your sons.

There will be no stamp duty land tax (SDLT) implications by bringing your sons into partnership as you are all also regarded as connected for SDLT purposes.

You should also be aware that if there is a herd election in place for any cattle or sheep farmed by the partnership, then the admission of your sons as partners will require a new election to be submitted to HM Revenue & Customs to continue this tax efficient treatment.

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