Property
Sales by Farmers and the CGT Pitfalls
PLEASE NOTE: This article was written prior to the abolition of taper relief with effect from 6 April 2008.
The decline in farming incomes over recent years
has resulted in many farming businesses facing increasing liquidity
problems and rising dependency on bank borrowing and other forms
of credit. Unfortunately the short-to-medium term outlook shows
little sign of recovery and some in the industry are therefore
faced with the inevitable conclusion that to survive they must
realise some of their capital in order to reduce debts.
When considering sales of property it is vital that
the Capital
Gains Tax position is reviewed in advance. Many sales of agricultural
land and buildings, owned prior to 1982, were unlikely to result
in a tax charge. However those farmers fortunate enough to own
property with development potential must take particular care
to ensure that on future sale the capital gains tax bill is kept
to a minimum.
During Gordan Brown's term of office as Chancellor
the Capital Gains Tax legislation has become increasingly complex.
Indexation allowance applies only up to April 1998, taper relief
starts from that date. For land and buildings used in the farming
business, taper relief should reduce the tax charge on any gain
to no more than ten per cent, if owned for more than two years.
For non-business assets the position is much worse with the maximum
charge only coming down to 24% after ten years of ownership.
The taper relief provisions are highly complicated.
It is easy for an asset which was assumed to satisfy the 'business
asset' criteria to have fallen foul of the provisions therefore
being taxed at the less favourable 'non business asset' rates.
For example, a farm building, which is surplus to
requirements, may be let to supplement farm income. This may convert
the building from being a business asset to that of a non-business
asset with potentially serious Capital Gains Tax consequences
if the building is sold at a later date and realises a substantial
gain. Advice must be taken when considering the change of use
of property to work out the tax consequences.
In the past, farmers may have sought to defer all
or part of any Capital Gains Tax charge by reinvesting in farmland
or other qualifying assets and claiming rollover relief. The impact
of taper relief means that the position is now far from straight
forward and it is essential that the position be considered in
detail. The timing of disposals can also have a crucial affect
on the Capital Gains Tax liability, particularly where brought
forward losses are available.
The key to successful Capital Gains Tax
mitigation is planning. It is vital that professional advisors
are made aware of farmers' plans for the future so that proper
advice can be given before it is too late.
Practical Examples of our Capital Gains Tax
Expertise
- Calculating the capital gain on selling a buy-to-let
residential property.
- Advising on the tax treatment of selling off part of
your garden as a building plot.
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