Business Clinic: Should we surrender tenancy and create LLP?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Carly Drummond, senior tax manager at MHA, advises on the tax implications of a tenant farming partnership changing its structure.

See also: Business Clinic – is there a CGT issue for tenant farmers renting out their own houses?

Q: Our farming business operates under an Agricultural Holdings Act (AHA) tenancy with the business partners renting land from other family members.

What are the tax implications for the business if the tenancy is surrendered and a limited liability partnership (LLP) created, with both owners and partners brought into the new LLP?

The intention of doing this is to obtain business property relief (BPR) from inheritance tax (IHT) after two years, to get round the agricultural property relief (APR) limitations which are only available on 50%; that is, the agricultural elements of the estate.

A new LLP would create a single entity with all as partners, some working in the farming business and some not. Profit shares/drawings in lieu of rent would be allocated by agreement.

A: This situation (or variations on the theme) is not unusual, but it needs to be approached with great care and with the help of an experienced agricultural lawyer.

There are likely to be implications for stamp duty land tax as a surrender and regrant is in essence an exchange of land interests and, although there are potential exceptions, there are potential pitfalls.

Otherwise, the principal direct tax issue (aside from the desired IHT outcome) is that of capital gains tax (CGT).

Where a lease is surrendered and a new lease granted, there is a potential disposal for CGT purposes.

If the transaction were at arm’s length, the value could readily be ascertained, but within the family the deemed proceeds will be based on market value.

The first line of argument will be that the grant of a new tenancy at market rent has no capital value on the open market.

The converse argument will be that numerous comparables can be found to indicate that an AHA tenancy surrendered at arm’s length has often given rise to capital sums.

If these arguments are successfully resisted, there are two potential ways around this problem. Firstly, an extra statutory concession (ESC D39) can be claimed where certain conditions apply, as follows:

  • The transaction, whether  between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at arm’s length
  • The transaction is not part of or connected with a larger scheme or series of transactions
  • A capital sum is not received by the tenant
  • The extent of the property under the new lease is the same as that under the old lease
  • The terms of the new lease (other than its duration and the amount of rent payable) do not differ from those of the old lease. Trivial differences should be ignored.

Where the condition applies, the extended lease is treated as having been acquired on the date that the original lease was acquired.

An alternative approach may be for the old partners to claim rollover relief so that the gain arising on the old tenancy is deducted from the notional value of the new one.

Again, care is needed because rollover into a depreciating asset (with a life of less than 60 years) will recrystallise after 10 years, and each partner’s CGT position will need to be considered separately.

A holdover claim may be required for the value which is passing from an old partner to a new partner who was formerly a landlord.

Tenancy Reform Industry Group reforms in more recent years have made it easier to grant a replacement protected agricultural tenancy, and this legislation should be considered alongside the position.

So yes, the plan might work, but it is much more complex than it appears. Ideally the terms should match D39, but nothing should be done until detailed and specific professional advice has been taken.

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