PLANNING CAN CUT DOWN CGT
As farm incomes remain
under intense pressure,
many producers are having
to realise assets to cover
losses, but capital gains
tax can be a big problem.
A little bit of planning can
save huge sums, as
Robert Harris discovers
SELLING a let cottage or converted farm building may seem an obvious way to boost the bank balance. But high capital gains tax bills can soon play havoc with the figures, warns Mark Hill, head of Deloitte & Touche Agriculture.
"The problem is, if a let cottage is sold away from the business it is unlikely to be treated as a trading asset. This means it does not qualify for business asset taper relief or, less importantly these days, rollover relief."
Simply put, 40% of the gain over the cottages base value, give or take a bit for personal allowances and the offsetting of income losses, will be payable in tax. A cottage that has been in the business since 1992, for example, may have a tax base value of £150,000. If the farmer sells it for £250,000, then the tax bill could be as much as £40,000.
However, for dairy farmers in particular, help is at hand, says Mr Hill. "By crystallising a loss from some other business asset – selling it and buying it back later at a lower price – farmers can reduce or even offset the gain completely."
Most dairy farmers have purchased additional quota since it was introduced in 1984. "The number of quota holders has reduced considerably since then, so the remaining producers will have purchased a significant proportion of their current holding."
A typical producer might carry a base cost for tax purposes of about 30p/litre, which is about 8p/litre more than the current purchase price. "By selling his quota, the farmer will effectively generate a capital loss. On 1m litres, that would amount to £80,000, which can be set against the capital gains."
The farmer then buys his quota back. But great care must be taken when re-acquiring the necessary quota to crystallise the loss, and specialist advice must be sought, says Mr Hill. "For example there must be an interval of at least 30 days between the sale and purchase and, of course, there is a risk that prices could move adversely in that period."
If quota gained in value, this would erode the tax saving. Even a 1p rise would add £10,000 to 1m litres of quota. "To avoid this risk it is possible to involve family members but this is a complex area and again, advice should be taken."
Transaction costs are likely to amount to 1-2% of the sale price – in this case, about £2000. "But where you have large gains on non-business assets this is a small price to pay to save a 40% CGT bill," says Mr Hill.
Capital gains tax can punch a big hole in non-trading asset values, says Mark Hill.
PalKeeping track of tax… Milk quota can be used to crystallise a loss to offset capital gains on assets sold away from the busine