Font Size

Farm Development Land - Having The Cake And Eating It

 By

Julie Butler - Expert Author

Tax Articles
Submit Articles   Back to Articles

14 November 2013

With far greater development opportunities returning to the UK many farmers are looking to sell development land, achieve Entrepreneurs’ Relief (ER) and yet stay farming. How can all these goals be achieved? And just as a side issue they want IHT relief protected at all times!

New Farming Partnership

The basic principle is that Entrepreneurs’ Relief will be due where a trader disposes of assets used for the purposes of a trade within three years of the cessation of that trade, if the trade has been carried on for at least 12 months prior to the date of cessation (TCGA 1992, s 169I(2)(b)).

The existing partnership could transfer potential development land to a new partnership with holdover relief on any change of beneficial owners provided the proposed development land qualifies for holdover relief, ie it is agricultural property etc. Provided the farmland is partnership property it should achieve BPR (Business Property Relief) in the event that no sale takes place.

The new partnership has to be trading for a year after which it will cease, sell the development land and the partners claim ER. Quite simple? The land is used for a trade qualifying for ER. So what are the problems?

1)      The land doesn’t qualify for ER, ie it is not a business asset or it does not qualify for APR and therefore cannot be handed down in the first case

         The solution is to ensure the land does qualify for the initial holdover and then the subsequent ER. Action points in the new business: a trade, a Partnership Agreement, profit, an excellent business plan, strong accounts and, above all, the real facts tie into tax planning. The business structure really happens in practice.

2)      The original landowners do not want to pass down the land (and profit) to other family members

         They do not want the development profits with the next generation. They can be partners in the new business but should not have control. Sale of one part of the farming operation could be the solution here. The Capital Gains Manual at CG64030 (“Entrepreneurs’ Relief: disposal of part of a business, discussion of case law”) looks at whether a business or part of a business has been disposed of. In the context of retirement relief, it states that for relief to be due, “the whole of those activities must cease when the relevant asset or assets are disposed of. By contrast, if an asset or assets have been sold but no particular activity or set of activities disappeared with the asset of disposal, it cannot be said that any part of the business has been disposed of. Relief would not be due.”

         The section then discusses farming. “ITTOIA 2005, s 9 treats all farming the UK as one trade. However, it is clear from the judgements in retirement relief cases that the courts were prepared to allow relief if the taxpayer disposes of one kind of farming business and then starts another. This approach should be followed for Entrepreneurs’ Relief.”

         If the development land is all on one part of the land, eg the beef operation then the beef operation could cease.

3)      The new business will not have been owned for two years for BPR

         For any of the new partners who are old, ill or not protected by surviving spouse there is a window of IHT worry. For example, if one of the new partners were to die in the two year gap from transfer there would be a loss of BPR. As this is potential development land there would be potential development land value (hope value) which needs the protection of BPR as APR is restricted to agricultural value.

Keep the Existing Partnership until Disposal

The existing partnership would have to cease on disposal of the land to the developer. If the land is sold in tranches then the sale might take longer than three years so ER would not be achieved on part of the disposal.

To bring about cessation a new company (We Love Farming Ltd) could be set up to farm the non-development land, and there could be a  transfer of that land into the company. Stamp Duty Land Tax issues will need attention. The old farmland can be let to the new company. There is no restriction on the use to which the asset can be put between the cessation of trade and the date of disposal of the asset.

There are IHT problems to flag up.

a)      Whilst the land is being sold in tranches and let to the NewCo (We Love Farming Ltd) it is not a business asset for shareholders not having control of the company and therefore may not qualify for BPR and even if it does the rate of relief will be only 50%.

b)      Any farmhouse cannot go into the limited company because of a variety of tax issues relating to its use as a residence and  only controlling interests in the company achieve APR. However, review of the structures of occupied for Agriculture following the Upper Tier Tribunal case of Hanson v HMRC [2013] UK UT 0224(TCC) the APR on the farmhouse can still be achieved.

With the amount of houses needed in the UK these type of conundrums will become everyday problems…and some would say nice problems to have.


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).



Follow us @Scopulus_News

Article Published/Sorted/Amended on Scopulus 2014-06-04 09:13:29 in Tax Articles

All Articles

Copyright © 2004-2021 Scopulus Limited. All rights reserved.