Transformative Change and Capital Taxes
There are many factors currently influencing both global and national agriculture, from changes in consumer trends and technological innovation, to concerns around climate change and the focus of Government subsidy.
Many families are therefore thinking deeply about the future of the farm, engaging in helpful and constructive conversations to explore how their businesses could transform, and what might be the best use of the land going forwards.
Where no successor has been identified opportunities to realise asset values through a sale are often being explored, be that at agricultural value to another farming business, or at elevated values for property development, or emerging markets for nitrate and phosphate management.
Where the succession process is underway and capital investment is being contemplated, often consideration is being given to who should own land. Transferring assets to the next generation to give them control and the ability to secure funding, together with financial independence from the retiring generation, can be very helpful in strengthening family dynamics and ensuring objectives remain aligned.
Whilst considering these commercial opportunities it is sensible to have the key principles of the main tax implications in mind.
Sale of Land:
Profits realised when selling land are usually subject to Capital Gains Tax (CGT), currently levied on land sales at up to 20% and up to 28% on residential property. There are two main reliefs to mitigate liability to tax that can be available.
Rollover Relief can apply where the land sold was used for trading purposes and the seller reinvests the sale proceeds into replacement land, which is also used within the trade. The reinvestment of proceeds must take place within the period from 12 months before the sale of land to 36 months after the sale. Reinvestment into land subject to any form of agreement regarding its occupation should be carefully considered. For relief to apply there is a requirement that the land must be brought immediately into use within the trade, which cannot be satisfied if another party has occupation by virtue of a contract or lease.
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, can apply to reduce the rate of tax suffered to 10% on qualifying gains. There are three routes to obtaining this relief, all of which have different qualifying conditions. The rules vary depending on whether you are selling an interest in a business, associated assets held personally, or associated assets held within a trust. The main principle is that this relief is available to a seller who is retiring or partially withdrawing from the business. Relief is not therefore available for the mere disposal of assets. An individual can obtain relief on up to £1million of qualifying gains during their lifetime, which can be very helpful, but can also be insufficient to cover significant gains on valuable land disposals.
The above reliefs should not be taken for granted and the qualifying conditions should be carefully examined to ascertain if they can be fulfilled in the family’s specific scenario. To optimise tax efficiency, it may be necessary to arrange the sale in a specific way and execute the steps in a precise order. Timing is often critical, and often overlooked.
Although not impossible, it can be difficult to obtain a mixture of the two reliefs. The qualifying criteria for Rollover Relief are based around reinvestment and business continuity, whereas the criteria for BADR are based around retirement and withdrawal from the business, a direct conflict.
Although not an immediate concern, it is often sensible to consider the impact on exposure to Inheritance Tax (IHT) when selling assets. Where an asset that benefits from relief from IHT, such as land used within a farming business, is sold, and replaced with an asset that does not benefit from relief, such as cash or stock market investments, there can be a significant impact on the seller’s taxable estate. This can often result in a more substantial impact on the family due to the current rate of IHT being 40%.
Gift of Land:
Where land is gifted between family members the disposal is assessed to tax as if market value proceeds were received by the transferor. A tax liability therefore arises unless relief is available.
Holdover Relief can apply where the assets being transferred have been used for trading purposes during the period they have been owned. Where an asset has been used partly for the purposes of the trade and partly for investment activities, such as letting out part of a building for storage, the amount of relief can be restricted. The level of relief available can also depend on what type of asset is being given away, land or buildings, and under which of two routes relief is being sought.
A gift of Furnished Holiday Lets, or dwellings occupied by workers employed in the farming business, to a family member can benefi t from relief, although a gift of let properties cannot.
The gift of a farm that has been used within the family’s trading business can therefore often include assets which do not benefit from full relief. It should be understood before the gift is implemented whether a tax charge will arise and, if so, whether the liability can be mitigated by structuring the transfer differently, such as utilising family trusts to access relief differently.
Additional care should be taken where the assets to be transferred have borrowings attached to them. If the transferor’s liability to the lender is discharged as part of the transfer, that value is deemed to be proceeds for the transfer of the asset. This may result in Holdover Relief being restricted, or unavailable, and a charge to tax.
The transfer of liabilities secured against land can also trigger a charge to Stamp Duty Land Tax (SDLT) for the individual that receives the asset. The SDLT position is very different for transfers of assets that constitute “partnership property” compared to assets which are the personal property of a specific partner or partners. The presence of non-natural partners, such as trustees or a company, can further complicate the SDLT position. Transfers involving such businesses should be comprehensively understood early in the project to avoid unexpected and undesirable charges to tax.
As with the sale of assets noted above, the longer term impact of gifts on exposure to IHT should be considered prior to a gift being implemented. The gift of assets from an individual to an individual constitutes a Potentially Exempt Transfer (PET) for IHT purposes. The value of the gift remains within charge to tax in the transferor’s estate until after the seventh anniversary unless relief is available. It is therefore important to understand whether, and to what extent, relief will remain available after a transfer of value.
So, to conclude, we are in exciting times with many farming businesses contemplating transformative changes in the way they operate to take advantage of emerging opportunities and mitigate risks that are appearing within traditional systems. Part of this process may be to realise asset values and/or transfer assets into the hands of the next generation. As well as exploring the commercial factors it is important to also explore the primary tax impacts, to ensure that the “cost” of capital transactions is understood before they are incurred.
Dan Knight FCA CTA
Dan joined the practice in 2019 having previously worked for a regional firm culminating as Head of Rural Tax.
Having grown up on a dairy farm on the Dorset/Somerset border, Dan spent a number of years working in agriculture before becoming a Chartered Accountant and a Chartered Tax Adviser. Harnessing both his practical and professional experience, Dan has spent the last decade advising farming businesses across the region on a wide range of issues.
Passionate about his work, Dan specialises in succession planning and restructuring, helping farming families to implement change, accomplish their ambition and enhance the legacy for future generations.
Dan is a keen shot in the field or facing the trap and thoroughly
enjoys supporting his young son on the football field.