How to avoid the tax pitfalls of development land
© Tim Scrivener/REX/Shutterstock Farmers whose land has been earmarked for development must act immediately to avoid the myriad of tax pitfalls, warns Gary Markham, owner of rural tax specialists Land Family Business.
Mr Markham says more farmers are finding themselves drawn into development areas as the government presses on with a drive to complete major infrastructure and housebuilding projects.
It has pledged to spend £600bn on 700 major housebuilding, rail and road improvements over the next 10 years, so hundreds of farms will be affected.
See also: Housebuilding boom – what does it mean for farmers?
The major tax issues for landowners involved are Capital Gains Tax (CGT) and Inheritance tax (IHT), says Mr Markham.
For IHT, the usual agricultural reliefs do not cover the potential development value of land in the buildup to planning.
In some circumstances, it is possible to find that a piece of land could incur 20% CGT if the value has not been rolled over. It can then be hit again with IHT at 40% if the landowner should die holding the cash
The first thing to do is establish who actually owns the land and who farms it, advises Mr Markham.
For example, is it held as Tenants in Common or Joint Tenants? And who else has any interest in the land such as previous owners, a limited company or family partnerships?
In a situation where personally owned land is farmed by a limited company, it is important that the owner of the land has more than 50% of the shares to control the company, says Mr Markham.
Above all, he says, the key to ensuring the best financial outcome possible is to act as soon as there is an inkling of a development project on the horizon.
“Even a local press article can increase the so-called hope value of land and it is essential this is properly assessed by a specialist team, including a land agent, tax accountant and lawyer and all legal paperwork is drawn up correctly.”
Mr Markham has developed the following four-stage checklist for anyone affected by a development to consider.
1. All relevant paperwork must be complete
Check:
- Annual accounts which need to clearly identify Land Capital Accounts for individuals
- Partnership agreements
- Wills of all owners to ensure that they are up to date.
- Note that a Partnership Agreement can override a will
2. Ensure the most efficient ownership
- Avoid the worst-case scenario, with cash ending up with elderly individuals and attracting 40% IHT on death
- Is the land eligible for holdover relief – i.e. can it be gifted with recipient taking on base cost?
- Use inter-spouse transfers, which are tax free
- Gift land early before hope values rise as the development gets closer
- Decide where you want the cash to end up. It is important to remember that the cash will not be eligible for IHT relief. However, if it is used to replace agricultural property then the relief can be obtained
- Lifetime gifts of land that are converted to cash will be subject to the seven-year rule
- Roll over cash into other assets. These assets must be brought into immediate use in the business to be eligible as a rollover.
3. Ensure the deal is structured correctly
- The sale will be the trigger point for the disposal for CGT. This will be on an unconditional exchange of contracts, i.e. the usual arrangement for property sales
- Many will have “conditional” contracts, where sales will depend on planning permission, so it may be difficult to manage the actual disposal date
- Beware if the developer offers property e.g. a house/houses as payment or part payment – they still need to be treated as proceeds
- Beware arrangements where payments are linked to eventual house sales. In this case, you may be treated as trading rather than a capital sale. Proceeds may be subjected to income tax at a much higher rate than CGT
4. Ensure the deal is eligible for Entrepreneurs’ Relief (ER)
- Ensure landowners in land pooling arrangements are eligible for ER – this can be very difficult
- Equalisation agreements and phased disposals will be difficult to plan for this type of relief
- Beware historical non-business use as the ER may be time-apportioned in some circumstances
- The land needs to have been used in the owner’s business for at least 12 months before sale. Quite often, this involves restructuring a partnership, with new partners joining or entering into contract farming or share farming arrangements