With public finances likely to be under pressure for the foreseeable future, tax revenues and rates are likely to increase. Therefore, farming families need to maximise available tax reliefs when planning disposals and transfers of assets to the next generation.
Current legislation generally means that it is tax efficient for farming assets to be passed to the next generation on death. The availability of Agricultural Property Relief in respect of the agricultural value of land and buildings, and Business Property Relief, can mean that the total value of a farming business, including potential development value, will not suffer a charge to Inheritance Tax.
As Capital Gains Tax is not payable on death, and assets are inherited at market value at the date of death, farming assets can be passed to the next generation tax free with an uplifted base cost for a future disposal.
However, agricultural land and buildings with development potential that are not farmed by the owner, and farming assets held outside of a farming business by a partner or shareholder, will not be fully covered by BPR, therefore may suffer IHT.
Transferring assets before death
Despite the tax efficiency of passing assets at death to the next generation, there may be times when a disposal of farming assets is made during the lifetime of the owner.
For example, there may be children not involved in the farming business and the parents wish to avoid a future family dispute and the breakup of a farming business, so they require cash to allocate assets between all children. Funds may be required to purchase a retirement property for the parents, off the farm. Alternatively, an attractive offer may be received for farming assets, such as land with development potential.
Whatever the reason, whenever there is a requirement to sell farming assets during the lifetime of the owner, it should be ensured that any CGT liability on the disposal is minimised.
Where farming assets are sold and the proceeds not reinvested in qualifying assets, rollover relief is not available, therefore CGT will be due at the current rate of 18%.
Reducing the tax burden
Entrepreneurs Relief is available for “qualifying business disposals”, and reduces the effective rate of CGT to 10%. The relief can be available on a disposal of the whole or part of a business; a disposal of assets used in a business when the business ceases; and a disposal of shares in a company, where the relevant criteria are met. The relief effectively replaced Business Asset Taper Relief in April 2008.
However, Entrepreneurs Relief is more difficult to obtain for farmers, as it is designed for the sale of a business, which does not normally happen in farming. The relief has a lifetime limit of £1m of gains. Farmers need to plan any future disposal carefully to ensure that ER is maximised and CGT is minimised. As ER has a qualifying period of one year, it is worth planning well in advance of a disposal to minimise CGT.
For example, the sale of redundant traditional farm buildings and adjoining land for development is unlikely to meet the requirements for a qualifying business disposal for ER. If ER is not available, a disposal by a father and mother family farming partnership would suffer CGT at 18%. However, if the disposal took place at the same time as the introduction into the partnership of one of their children, the disposal can be regarded as part of the parents’ withdrawal from participation in the business of the partnership, and potentially qualify for ER. If the capital gain is £1m, this would result in a reduction in the CGT of £80,000.
ER is restricted where a full market rent has been paid to a partner after 5 April 2008, for assets owned personally and used in a partnership, and a disposal of the assets qualifies for ER. It may be possible to “wash out” any restriction if assets are transferred to a spouse who would qualify for ER on the disposal, they hold the assets for one year, no rent is paid, and then the assets are sold.
The one year qualifying period for ER means that future disposals should be considered at least one year in advance, to allow enough opportunity to maximise the relief and minimise any CGT liability.
Peter Griffiths is tax director at Hazlewoods chartered accountants.