When planning for your farming future Inheritance Tax (IHT) and Capital gains Tax (CGT) should always be on the menu when speaking with your land agent, solicitor and accountant. Do you consider selling the farm sooner or later, which may well incur a CGT liability at the point of disposal, or do you keep hold of the farm for future generations? Do you set up a trust or a company? Either way a tax liability is likely to arise, but the question is which is more beneficial, both to you now, in the future, and for those that will inherit your life’s work?
IHT is due at 40% on an individual’s property above £325,000. This can be doubled for married couples or civil partners and is due to increase between now and 2020, when the threshold for a married couple will be £1,000,000. (This will include the new relief of £175,000 per individual, specific to the main residence.) For agricultural property, Agricultural Property Relief (APR) is available at 100% for qualifying assets, and Business Property Relief (BPR) can be available on non-investment property owned or used by the business. The difficulty here is that in order for APR to apply you need to ensure you continue farming until the death of both yourself and your spouse. This route requires careful planning with your agent and accountant, which sounds expensive but if the difference between a 40% IHT liability and 100% relief is ‘on the table’, it should not be ignored.
If you would prefer to pass on your farm to the next generation it is vital to ensure that you/your spouse are/is considered to be farming when your heir(s) inherit the farming enterprise. This is particularly relevant in respect to the farmhouse which must be occupied for the purposes of agriculture in order for APR to be available. This can become an issue where, as retirement age looms, one considers letting the farm on a long term Farm Business Tenancy or taking a step back and letting someone else manage the farm. The risk here is that you may no longer be considered to be occupying the farmhouse for the purposes of agriculture, as you are no longer making the decisions. Here the interest you have in the business could also have ‘morphed’ from a farming business into an investment interest, which you are no longer farming yourself, and which no longer attracts APR at 100%. This could also cause problems for BPR, which is not available on investment assets, therefore leaving your family with a 40% IHT liability on your death. It may be prudent to consider certain contract farming or share farming options, however you will need to be involved in the ongoing management of the farming operations.
One alternative, and your accountant and agent will come up with many others tailored to your situation, is to consider selling the holding before your death, which might be attractive in some situations where partnership agreements or limited companies are less attractive as mitigation vehicles. However, selling the farm would likely create a chargeable gain, which could be liable to Capital Gains Tax (CGT) at a rate of either 18% or 28%, depending on your income tax band.
Capital Gains occur on the disposal of an asset where a substantial gain (effectively more than £11,100 in the year of the disposal per individual) occurs between the acquisition price and the sale price. Deductions are made to the gain, including purchase & sale costs and any expenditure post-1982 in enhancing the asset, before applying the appropriate tax rate.
Some assets are exempt including an individual’s only or main residence and wasting assets (those with a predictable life of 50 years or less).
There are also a number of reliefs available. Entrepreneur’s Relief (ER) reduces the CGT liability to 10% on qualifying assets. Such assets include all or part of your business as a sole trader or business partner, shares, and assets you lent to your business or personal company. Where you are disposing of all or part of your business you must dispose of all your business assets within three years of the sale or closure of the business. The vital element here is that you cannot continue your business activity, therefore for many retired farmers who wish to retain a few head of stock, this can cause problems by providing an argument that the business has not ceased but actually continues, therefore revoking the ability to claim Entrepreneur’s Relief. However, case law indicates that the disposal of assets which amount to the cessation of a particular enterprise, e.g. a dairy enterprise, should qualify for the relief even if the farmer continues to operate another enterprise, e.g. a beef enterprise on the remaining farmland.
There is also an important aspect to consider in respect to investment property (e.g. let property where there is little involvement in managing the properties themselves), in that ER is not available for businesses with substantial non-trading (i.e. investment) assets. Substantial in this context would mean that more than 20% of the net assets or income are/is derived from investment assets.
Rollover Relief applies to the disposal of a business asset where the proceeds are reinvested in another business asset in a four year period (one year before the disposal and three years after), and works by reducing the purchase price for CGT purposes of the replacement asset by the amount of the capital gain.
Holdover Relief is available for gifts of business assets. The donee is regarded as having acquired the asset at its open-market value, minus the held-over chargeable gain giving them a lower based cost in respect to any future disposal.
There is also a special rule for part-disposal of land. Where land is sold for £20,000 or less and the sale proceeds represent 20 per cent or less of the value of the holding, the taxpayer is treated as if he had not made the disposal, however the amount received reduces the allowable cost of the remaining land on a future disposal.
This is a complex area of practice and there are many pitfalls for the ill-advised. Accordingly it is vital that you consult all your advisors in order to ensure that you, your farm and your family are in the most advantageous position for the future.
