Plan to avoid taxing pitfalls

8 September

FARMERS looking to sell off assets or diversify could face a nasty shock from the taxman unless they do their homework first.

One of the most common pitfalls is selling small parcels of land for gardens or pony paddocks, warns Carlton Collister, senior tax manager at Grant Thorntons Witney office.

Such land is often worth 5000/acre or more, he says. But in most cases, it will have been bought a long time ago, and will have an agricultural value at March 1982 of perhaps only 1500. A large proportion of the sale proceeds may be a capital gain.

That could leave a farmer facing a tax bill of up to 40% on the gain. One way to overcome this is to transfer the property to other members of the family.

If capital gains are small, they can be covered by the annual exemption (7200) of family members. If larger gains are made, then those gains may still be tax-free if the proceeds for each individual are less than 20,000.

But there is a catch. Land worth four times as much as that transferred must also be signed over to the new family member owner from the farm. Despite what might appear to be major restructuring for a relatively small saving, the concept is being used, says Mr Collister.

Another common problem is selling redundant farm buildings for development. Provided these are classed as a business asset from April 1998, then the farmer only pays 30% on the gain, and this will fall to 10% for disposals after April 2002.

But if they have been let for commercial or other non-farming purposes, then the gain is likely to attract the full 40% CGT rate, he adds. In that case, it will probably be worth pulling them back into the business and retaining them for a further period to reduce the tax burden, he advises.

Another recent problem, fuelled by spiralling house price rises in the south east and now in the provinces, too, is unexpected, large tax bills on the value of the farmhouse on death

This is because the Inland Revenue argues that there is amenity value above the agricultural value of the house. For example, a house may be considered to have a true agricultural value of 400,000, covered by 100% agricultural property relief.

But, if the house were attractive enough, it could be worth 800,000. Provided no other chargeable assets were held on death, the farmer would qualify for the full 234,000 inheritance tax nil rate band. Only the balance would be taxed, leaving a bill of 66,400.

But, in most cases, other assets held at death would erode, sometimes completely, any nil rate band. In this case, the tax bill would rise to 160,000.

There is no standard solution; rather, a range of options depending on each business, says Mr Collister. This could involve signing over the house to children and moving into a smaller house, or accepting that tax will be payable and take out life insurance to cover this.