ASSET SALE TAX RELIEFS: ACT NOW
Make the most of current retirement tax reliefs which escaped last months budget but could well end next year. Suzie Horne reports
TO make the most of what are currently generous retirement tax reliefs on the sale of farming assets, the serious planning has to start at least 18 months from the planned retirement date.
"Two years notice would be better," says Mr Straghan. This way, quota and cows can be properly organised and decisions taken about how to best proceed with disposals.
"The first step is to talk to an accountant, checking on whether the cows are valued on the herd basis and whether you are eligible for retirement relief on quota sales. Cows on the herd basis can be sold tax free if a sale of more than 20% of the herd is made and not replaced within five years."
The alternative, the trading basis, may be far less tax efficient on retirement than the herd basis. "Cows may be valued in the accounts at £400 and sold for £800, resulting in a profit of £400 a cow. For a 100-cow herd, this will create an extra £40,000 profit for the farm and could cost as much as £16,000 in extra tax."
Businesses may switch from one basis to the other, but only on the occasion of a change in the title of trading. Examples of this include a variation in partnership shares or the introduction of a son into the partnership.
To qualify for retirement relief from Capital Gains Tax, assets must have been used in the business for the full trading year leading up to retirement.
"Some accountants are still missing the fact that quota leased out away from the business is not a qualifying asset," points out Mr Straghan. Planning early allows for such assets to be brought back into the business to attract relief.
To ensure maximum relief, in theory the assets should all be sold on one day. Farmers should therefore avoid the temptation to sell quota or other assets piecemeal and certainly not in two separate years. Such action can jepoardise relief on the whole of the farming assets.
Full relief may be available provided the person retiring has been trading for more than 10 years, is over the age of 50 and is a sole trader or partner. For those who have traded for less than 10 years, there is a sliding scale of relief.
The difficulty with tax planning of this nature is that there is no pre clearance available from the tax office which might allow a business to consult and seek approval before it takes action.
"Different tax offices treat retirement relief in different ways, but generally, the rules for retirement relief have to be strictly adhered to," says Mr Straghan. The disposal has to be made and relief claimed before you know that it will be granted.n
• How much will I need to live on?
• What pension policies do I have?
• What money will pensions provide?
• What is the shortfall?
• What will it cost to make up the shortfall?
• What can I afford?
Capital gains tax and retirement relief provisions
• CGT is charged at individuals marginal rate of tax – 25% or 40%.
• Individual personal exemption 1997/98 – first £6500 of gain.
• Gain calculated on value of asset in June 1982, less an allowance for inflation, compared with sum realised on disposal. If asset was not owned in 1982, then purchase price or transfer value less allowance for inflation..
• Retirement relief – first £ 250,000 of gain is exempt next £750,000 of gain is 50% exempt
• Strict rules on qualifying assets – must have been used in the business for at least one year prior to retirement (or disposal?).
• Person claiming relief must be aged at least 50.
• Must have been trading for at least 10 years.
• Disposals should take place close together – ideally on same day.
• All the above apply to sole traders and partners – relief for companies based on different allowances.