Farming as a shelter for CGT
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Planning permission for property development – tax planning around the
habitats directive and the possible planning gain supplement
Originally published 20 December 2006
The pre-Budget report produced understandable interest in the timing
considerations of property development projects.
It is a fact that all development projects will incur delays. From a tax
perspective it is generally essential that the asset e.g. land, property and or
buildings retain their business status during the period of waiting in order to
achieve maximum business asset taper relief (BATR) for Capital Gains Tax.
The rejection of property planning applications for environmental issues have
been legendary and obviously from the angle of the protection of wildlife and
our habitat totally justified. For example:
- An application for the development of a container port on the Solent was
rejected after a four year planning process, in part because of the impact it
would have on mudflats used by the dark-bellied brent goose;
- A development of up to 20,000 houses Thames Basin Heaths was blocked as it
threatened the habitat of three endangered birds including the Dartford
- Environmental protests led to tunnels being built under the M8 to protect
Badgers from the new road and rail link to Edinburgh airport.
So how does the need to obtain planning permission before the tax
“punishment” of the planning gain supplement reconcile to environmental delays?
Change in the Process of Rejection for Environmental Issues
Many of the delays and rejections are caused by the “Habitats Directive”.
Ironically it is good news for development projects with regard to timing.
Following a European Court Ruling, Planning Circular 06/05 is being amended to
make clear that the Habitats Directive applies to the assessment of development
plans. Under the new regulation it is likely (and hopeful) that development
projects will be rejected at the development plan stage rather than following a
full planning enquiry. The regulation should come into force in 2007 and give
greater clarity to timescale.
The advantages of business asset taper relief (BATR) have been well
documented. To qualify for BATR the asset must be used in an individuals own
trade. Since 6 April 2002 provided that a business asset has been owned for a
minimum of two years and used for a business purpose then the rate of capital
gains tax is 10% (40% top rate of tax less 75% business asset taper relief). The
serial entrepreneur could possibly take advantage of these business rules by
aiming to ensure that land due for development would obtain business status.
The obvious choice of trade to establish business status is farming which
includes stud farming - many potential developers have taken advantages of
contract farming arrangements or grazing agreements to establish the activity of
a trade. With the necessity for alternative land use within the farming world,
the business could be a diversified activity although this could involve more
complications in trying to achieve business status for BATR.
The benefits of planning application delays
Many of the delays caused by the planning authorities can help the tax
efficiency of the project – BATR requires that the asset must be owned for two
years AND have full business status for that time, problems of ensuring that the
application is compatible with local planning policy can serve to ensure that
all the necessary tax criteria are in place for the project. But where does that
leave the impending threat of the planning gain supplement?
The tax problems of the Limited Company
A Limited company is a business vehicle that is not eligible to claim BATR on
the disposal of company assets. A company is eligible however to claim
indexation allowance. Property with development potential might be removed from
say an owner managed company before the planning permission is obtained. This
could be fraught with tax difficulties e.g. the tax charge as the asset leaves
the company both in terms of corporation tax on the potential gain and
distribution to owner manager. Accurate valuations at the point of exit will be
critical and it is extremely likely that the district valuer will try to
question the quantum. Ironically the apparently tardy behaviour of the planning
authorities can help towards achieving the two years of non-corporate ownership
for BATR plus help in arguments with the valuation especially when the time
delays between approaching the planning consultant and achieving planning
consent is potentially decades not years.
The problems of the lengthy planning process
The timing delays can have expensive tax disadvantages to the owners of the
business asset used in the business and from 6 April 2004 property let to a
trade under s.160 FA 2003 qualifies for BATR. If the frustration and
anticipation lead the owner to not use the asset in the trade e.g. farmland left
fallow (but not forming part of formal set-aside) or industrial units not let or
not used by the business then “tainted taper” could enter the future CGT
“Non-Use” of an asset in a future CGT calculation
The view of HMRC (see para 17958 of the capital gains manual) is that “…no
apportionment is required where part of the asset is not being used at all.
Where part is being repaired or refurbished, that part is unlikely to be capable
of having any use. However, refurbishment by a lessor may amount to use in the
There has been a distinction here between “part of the asset is not being
used at all” and the whole of the asset. When large development proceeds are in
the pipeline it would be bold for the owner to leave any part of the land that
is due to be developed unused. Buildings should be used for storage in the same
way farm land should be “contract/share” farmed until the property is sold to
the developer. It is considered that it is now HMRC’s view that parts of assets
that are not used at all are ignored for apportionment under para 9 schedule A1
HMRC consider that if a building is being refurbished by an owner-occupier it
will not qualify as a business asset for this period on the basis that it is not
‘being used’ for the purposes of the trade as it probably can’t be used at all.
A building that is not being used at all is a non-business asset and, if
subsequently used for the purposes of a trade, will lead to a mixed-use taper
relief computation on sale. During a period of refurbishment of a property the
owner might again be able to use part of the building for say storage for the
Mixed use – time apportionment
The BATR could be tainted for mixed use. The statutory guidance at para 3 sch
A1 TCGA 1992 states BATR is to be given to reduce a chargeable gain arising to
an individual, to trustees or to executors on the disposal of a business asset
if that asset was a business asset throughout its relevant period of ownership.
But what if there has been a lapse? Sub-para (2) then extends the concept to an
asset that has not been a business asset throughout the relevant period of
ownerships on the basis that the asset has been a business asset throughout one
or more periods of its relevant period of ownership, then a part of the gain is
to be taken as if it were a gain arising on the disposal of a business asset and
the remainder a gain on the disposal of a non-business asset. The apportionment
of the gain between business and non-business as explained at sub-para (3) is to
be done on the basis of the lengths of the periods during which the asset is
taken to have been a business asset.
Mixed use – assets used at the same time for different purposes
Para 9 sch A1 TCGA 1992 states that in ‘Cases where an asset is used at the
same time for different purposes’, a further apportionment is required. This
gives guidance on situations where the asset, during a period, is a business
asset by reference to the purposes for which it is used, but is also, at the
same time, put to a non-qualifying use.
For that period, the ‘relevant fraction’ of the period is to be treated as a
period during which the asset was not a business asset. The relevant fraction is
defined as the fraction which represents the proportion of the use of the asset
during that period that was a non-qualifying use.
Mixed use – proportion of non-qualifying use is different at different
It is further provided that, if the proportion of non-qualifying use is
different at different times, a separate relevant fraction has to be used for
each period for which there is a different proportion.
According to para 21 sch A1 TCGA 1992, the calculation of the ‘proportion of
the use of the asset during that period that was a non-qualifying use falls
within the general rule for apportionments: on a just and reasonable basis; and
on the assumption that an ‘amount’ falling to be apportioned by reference to any
period arose or accrued at the same rate throughout the period over which it
falls to be treated as having arisen or accrued. So what is “just and
reasonable” – what does the judgement have to be?
HMRC have now agreed that where an asset has been used partly for purposes
that qualify as business use under para 5 sch A1 TCGA 1992 and partly for
purposes that do not, any apportionment that is needed should be based on area
and not on value (or any other basis). This is particularly relevant in the case
of farms and estates especially where development or high value gains are
Part disposals out of mixed-use assets – apportionment of gain.
If the details so far appear confusing then reinforcement needs to be sought
through the guidance via Capital Gains Tax Manual 17959.
Where there is a part disposal of an asset that has been used partly as a
business asset then an apportionment of the chargeable gain needs to be made for
any ‘mixed-use period’. That apportionment of the gain on the part disposal is
necessary to separately apply the business and non-business rates of taper
relief. It should be based on the use of the whole of the asset during the
relevant period of ownership and not the use to which only the disposed part of
the asset was put (if different). The relevant period of ownership will run from
the date the asset was acquired (or 6 April 1998, if later) to the date of the
part disposal transaction up to a maximum period of ten years.
Following a part disposal when the remainder (or a further part) of the asset
is disposed of it will also be necessary to apportion the gain from that later
transaction into business and non business elements. That apportionment will
again be based on the use of the asset in the relevant period of ownership. That
period runs from the date the asset was originally acquired (and not from the
date of the intervening part disposal) through to the date of the later
transaction. The apportionment of the gain on that later transaction is
determined by the respective business or non-business use of the asset, or so
much of the asset as was actually held by the owner at any time in the period.
Statement of practice D1 does offer an alternative approach that may be
adopted in the case of part disposals where there has been no previous part
disposal completed under the statutory formula.
Contract with developer – ensure the paperwork is in place
It has been known for property owners not to show the contract with the
developer to their tax adviser on the basis that planning permission has not
been obtained yet so why waste money?
In a more extreme case that went to the Court of Appeal there is clear
evidence as to why all parties should sign a well reviewed contract, option or
promotion agreement. The decision was that the developer was awarded a 50% share
in the increase in value of a property due to the grant of planning permission
to the developer who invested in obtaining the planning permission. The
developer’s action, relied on a verbal agreement that the landowner would sell
the property to him. Developers should remember though that in order to succeed
it was necessary to show unconscionable conduct on the part of the landowner.
This element of unconscionable conduct will often be difficult to prove. The
contract should define the future “tax point” and the basis for the calculation
of the tax due.
Ring fence development land
The “waiting game” might give the tax payer the opportunity to remove the
potential development land from the main trading operation to ensure that the
mixed used problems of BATR are avoided (no doubt the planning authorities will
allow enough time). The downsides are clearly the valuation on exit from the
main trade, the possible early payment of some CGT and risk of attack by HMRC
for artificial transactions. There is also the need for the future problem of
the planning gain supplement to be considered.
Early review of potential tax liability and possible use of Tax Counsel
Clearly the tax problems that surround the CGT calculation dictate an early
review and possible CGT “tax audit”. It will be essential to be able to use
accurate property values and estimates/calculations of proceeds of future
development etc. The complexities and potential size of the capital gain and
potential downside of a substantial tax liability if the 10% CGT rate is not
achieved would point towards the instruction of a tax barrister to help decide
the way forward.
The decision will rest with the client, the tax adviser has a duty to ensure
that all the tax “pitfalls” have been risk assessed and then the planning
application will be successfully opposed for environmental issues such as Grass
Hoppers or Dark Bellied Brent Geese or the Dartford Warbler. Perhaps 2007 will
be the year when there are rejections at the development plan stage and not
after years of debate and abortive tax costs. Hopefully the early decision will
assist with considerations as to potential tax liabilities and the future risk
of the planning gain supplement.
About the Author
Article supplied by Julie Butler F.C.A. Butler & Co, Bowland House, West
Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email;
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land
Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd
edition) and Equine Tax Planning ISBN: 0406966540. To order a copy call Tottel
Publishing on 01444 416119.
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Article Published/Sorted/Amended on Scopulus 2007-07-21 01:09:14 in Tax Articles