Changes to PDRs for houses and commercial uses appear to be a windfall opportunity for many farming businesses. There are, however, many legal and taxation planning points that are well worth checking before going ahead to make sure the full benefit of the opportunity is realised.
There are four direct and indirect taxes that need to be planned for, depending on whether the property will be retained, rented or sold:
- Capital gains tax (CGT) which is 28% for individuals and most likely 20% in a company.
- Inheritance tax (IHT) which is commonly 40%.
- Stamp duty land tax (SDLT) which in this context ranges from 0-4% on assets up to £1m in value.
- VAT which is normally 20%.
However, there are reliefs for all of these taxes if carefully considered.
What are the objectives once planning permission is obtained?
The first step is to discuss and agree the objectives within the family and with advisers. Is the plan to:
- Sell with planning permission?
- Retain for a member of the family to live in?
- Retain for a member of staff?
- Retain to let it out?
Ownership of the building
The most important point at this stage is for the family to agree who is, or who are, the owners – this is quite often rather vague because of a lack of clarity in the documentation.
The beneficial ownership can be different to the owners of the legal title and the tax outcomes for the same asset in different ownership can vary wildly.
Although who owns the land or building may appear to be straightforward, it is quite common in farming families for the answer to be completely different to what might appear at face value.
Firstly, is the building held as partnership property? If so, the partnership agreement needs to be checked to see what it says about capital profits. The distribution of the proceeds of any sale will follow what the partnership agreement says.
If the agreement is silent on this, or if there is no written partnership agreement, it is likely to be owned equally by all of the partners based on the Partnership Act of 1890 despite it being bought and registered by one or more of the family. Equal ownership will confer equal distribution of sale proceeds.
Note that a partnership agreement overrides the terms of a will or other agreement.
The annual accounts need checking to see how they show the land and property.
If a building is held outside the partnership it may be subject, together with land, to a tenancy in favour of the partnership. If this is the case then if it is to be sold it needs to be released from the tenancy either by surrender, notice to quit or a merger of interest. This is because a tenancy will have value and could give rise to a CGT liability.
The farm building may be owned by a limited company and could result in a double taxation charge if the building with planning permission is sold and the cash subsequently withdrawn from the company.
Tax planning –key points to discuss with advisers
There are several ways of minimising capital gains tax:
Make sure the building is a business asset used in the business otherwise it will not be eligible for entrepreneurs’ relief, which takes CGT down from 28% to 10%, or rollover relief. Never use the words “redundant farm building”.
The building must have been used in the business for at least 12 months by the owner before disposal to be eligible for ER. This is a very valuable relief and can provide a cash boost for the core farming business but the eligibility rules are very specific.
Basically there are two principal methods of achieving ER, one means closing the business down, which is often not practical, and the other involves the asset to be sold as being held being outside the partnership and the owner making a disposal of a part of the farming business at the same time. Timing is crucial.
If there is a SIPP or SSAS in the family that holds land, consider rolling over into purchasing the land out of the pension scheme.
Ask your accountant to look at the part disposal rules, which can achieve a more favourable calculation of the immediate tax liability.
IHT planning should be an ongoing exercise within the family as part of the succession strategy.
Houses and buildings let to third parties need to be held as partnership property to be eligible for IHT relief – held outside the partnership it is less likely that there is any relief.
Let properties held within a partnership should ideally not be greater in value or income than the underlying farm business.
Avoid large cash balances being held by the elder generation as there is no IHT relief on cash, unless invested within the partnership as working capital. Such cash balances are likely to arise from the sale of assets owned individually.
Consider investing in shares if the family has a trading limited company.
Stamp duty land tax
SDLT applies to transfers of property.
- Assets introduced into a partnership can result in an SDLT charge.
- Exchanges of interest in land, including jointly owned land, can result in an SDLT charge (as well as a CGT charge) however there are reliefs under the partition of assets rules.
- VAT planning is an important and complex area of property development.
- Letting of land is an exempt supply for VAT therefore in principle VAT cannot be reclaimed on costs relating to rental income.
- The building of a residential dwelling on a greenfield site is zero rated.
- Consider opting to tax commercial buildings that are to be let to VAT registered tenants.
- Make full use of the VAT de-minimis rules within a partnership or a company allowing £7,500 of VAT to be reclaimed each year relating to exempt supplies.
These points illustrate how important it is to plan in advance and to ensure that all parties involved understand the implications and potential outcomes of the project. Always seek professional advice if in any doubt. Asking a simple question now could prevent potential problems later.