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Ated - Further Problems For Farming Companies

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Julie Butler - Expert Author

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Published originally 11 August 2014

The ideal trading structure for farms has been given much consideration over the decades. For various historic reasons some farming operations are owned by a limited company which includes some possible ownership of residential property, possibly a farmhouse. This can result in a multitude of problems, not least ATED.

The Introduction of ATED

Since 1 April 2013, non-natural persons (“NNPs”) holding UK residential property that was valued at more than £2 million on 1 April 2012 have been liable to pay a new annual tax on enveloped dwellings (“ATED”) and NNPs buying residential property of that value have had to pay SDLT at 15% on the price of the dwelling. Both of these tax changes were introduced as part of a series of measures in the 2012 Budget with the aim of discouraging the ownership of UK residential property through “corporate envelopes”.

At the same time, the charge to capital gains tax (“CGT”) was extended to NNPs that are within the scope of ATED for disposals of high value residential properties. Before this measure, companies would have paid corporation tax (with current rates of 20% or 21%) on chargeable gains rather than the normal CGT rate of 28%.

ATED “casts a wide net”

The Finance Act 2014 now extends SDLT at 15% and ATED over the next two years to apply to residential properties purchased and owned by NNPs valued at more than £500,000.  The new SDLT rate has been in place since 20 March 2014. For ATED, two new taxable bands will be created:

•                Residential properties worth more than £1 million but less than £2 million will fall within ATED from 1 April 2015 (the annual charge will be £7,000); and

•                Residential properties worth more than £500,000 but less than £1 million will fall within ATED from 1 April 2016 (the annual charge will be £3,500).

The annual charge for each of these new bands will increase in line with the rate of inflation, as with the existing bands.

The ATED-related CGT charge of 28% payable by NNPs on the disposal of property interests will also be extended to include these lower valued properties. Again, the extension to lower values will be in two stages. Disposals of enveloped properties with a value over £1 million up to £2 million will be subject to CGT from 6 April 2015 and disposals of enveloped properties with a value over £500,000 up to £1 million will be subject to CGT from 6 April 2016. However, CGT will only apply to gains that have accrued on or after those dates.

For those limited companies that own stately homes, farmhouses and farmworkers cottages, now is the time to seriously consider options of how to mitigate any possible penalty and to consider disclosure requirements. Dwelling includes ‘grounds and gardens’ as well as any land that is or is intended to be ‘occupied or enjoyed’ with a dwelling.

Agricultural Property Relief on Limited Company Ownership

For some time now residential property owned in the limited company has suffered tax disadvantages and currently the limited company has even more problems to consider and plan for. Firstly there is the question of benefits in kind (BIK) for directors. Secondly there is the complex issue that agricultural operations owned in the limited company do not achieve Agricultural Property Relief (APR) for Inheritance Tax (IHT) on minority shareholdings, i.e. shareholdings that do not control the company. It would therefore appear that it is essential to review residential agricultural property held in the limited company.

How can an ATED charge be mitigated?

These new rules may result in significantly increased compliance costs for those “genuine” businesses that own property that are eligible for relief from ATED but regardless of this currently have to comply with the obligation to file an ATED return. In recognition of the problem, the Government will be consulting on simplifying the administration of ATED for such businesses.

The ATED extensions to lower value properties have been announced well ahead of the deadline. There should be time for NNPs, which includes farms owned in a limited company, who may be affected, to consider restructuring how their residential properties are held. However, it is important to seek advice prior to “de-enveloping” regarding available reliefs and the impact of removing farm residential properties from their current structures. No doubt this will tie into announcements on “Active farmer” as part of CAP reform.

Relief for Farmhouses

Farming companies who may be affected by the extension to the ATED charge must consider the availability of the various ATED reliefs. There is a specific relief (calculated on a daily basis) available in respect of farmhouses occupied for the purposes of a farming trade if:

•                The farmhouse forms part of land occupied for the purposes of a farming trade carried on commercially with a view to profit: and

•                The person carrying on that trade, or a person connected with him, is entitled to an interest in the single-dwelling farmhouse.

For a farm that is owned in the limited company there are problems of the ATED charge when the land is let and the property is not “occupied” for the purposes of IHT. The compliance consideration of s 117 IHTA 1984 has to be considered. This could have the advantage that “occupation” test for IHT qualification is reviewed at an early stage.

A day is a relievable day for the purposes of ATED if on that day the farmhouse is occupied by either:

•                A farmworker (that is, an individual substantially involved in the day-to-day work of the trade, or the direction and control or its conduct) occupying if for the purposes of the trade; or

•                A former long-serving farmworker (that is, broadly an individual who previously had been a farmworker for a period of three years or more or periods totalling three years or more in a five year period) or the surviving spouse or civil partner of such a worker.

Substantial involvement in the day-to-day work, or the direction and control of the conduct of, the farming trade equates to spending 20 hours a week (on average) throughout the year on those activities and is concerned with the time spent by an individual and not the time spent by a group of individuals occupying the farmhouse. There is also relief for houses held in a limited company which are open to the public for at least 28 days per year.

Joint Property

As the legislation applies to single dwellings, it is necessary to look at the position on joint property.

Occupation of part of the dwelling is to be regarded as occupying the whole of the dwelling for establishing the extent of the relief. That is to say that where only part of a single-dwelling interest is occupied for purposes that would qualify for farmhouse relief then the whole interest will be treated as qualifying.

Action Plan for farming operations involving a corporate entity

All farming companies will have to question the tax treatment of residential properties contained therein and the ability to obtain exemption from the ATED charge. Where there are concerns over the disadvantages of Benefit in Kind (BIK) on the farmhouse together with APR and now ATED, a total restructure might be reconsidered mindful of the tax downsides and how they impact on CAP reform and the move to the Basic Payment Scheme e.g. the ”active farmer” rules. It is fair to say all legal and tax structures for farming operations with some corporate interaction must now be reviewed.

Examples of potential reconstruction:-

•                For those in a partnership with a “corporate partner” (mixed membership) an updated Partnership Agreement must be put in place together with a Shareholders Agreement. This must be tied into the December 2013 corporate partner legislation and the loss of the Annual Investment Allowance (AIA) of £500,000. Many would say the corporate partner has no future in the farming industry.

•                For those farms owned by a limited company, a total review of ATED, benefits in kind (BIK) and APR for non-controlling needs to be undertaken with considerations for a total restructure as appropriate.

The current tax planning “favourite” is for a “stand alone” limited company which runs alongside the partnership taking advantage of the fiscal benefits of the incorporation but not complicating matters with mixed membership or farm ownership.


About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email; j.butler@butler-co.co.uk, Website; www.butler-co.co.uk

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).



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Article Published/Sorted/Amended on Scopulus 2015-03-18 09:00:33 in Tax Articles

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