Whilst definitely not being tax experts, we are frequently asked by farmers and landowners where to start with Capital Gain Tax when selling property.
Capital gains tax (CGT) is paid on gains arising from the growth in value of property. Typically tax is paid on the difference between the base value (either when it was bought or inherited or the 1982 value if it’s been owned since then) and the sale value.
With farm assets such as barns that get planning permission for residential conversion or farmland that is sold for housing development, the gains can be substantial. One of the best reliefs is Entrepreneurs Relief (ER), which if you qualify, drops the normal 28% tax rate down to 10%. Qualification is not always easy and so it is important to start considering it early so changes can be made if needed.
This is where we would help, as the key to qualifying is to have a genuine business or ‘trade’. There are a few rules that we work to when helping clients establish or improve their trading status:
- The owners must have a business which is using the land.
- There must be an intention to make a profit.
- The business should be producing something for sale or selling a service.
- The business must look genuinely worthwhile, so if the business is small have a plan to grow.
- Develop a business plan to show the aims and intentions of the business.
One common error is where the land is let out which is classed as an ‘investment’ and not a ‘trade’. Grazing licences should also be viewed with caution. If the owner is preparing the grass for sale by spraying, fertilising, fencing etc., this may be viewed as a trade, but in most circumstances this is not happening.
Having taken further advice, the starting point is to develop a business plan and this often leads to a discussion on the business structure. This needs to include all the owners and be carefully considered to avoid any other pitfalls.
On arable land we would typically set up a contract or share farming arrangement with the owner/farmer taking risk and investing in the growing crops. In the case of grass, ideally a livestock enterprise or hay production and sale would be undertaken to demonstrate a trade. Alongside this, owning Basic Payment Scheme Entitlement and being VAT registered and claiming for both are useful ways of showing business activity. It is important that the business makes a small profit to show a genuine point to the business.
In terms of timing, one year’s trading is a minimum requirement, but the longer the better as this will reinforce the genuine nature of the business.
As mentioned at the outset we are not tax advisers and recommend that we work with you, alongside strategic tax advisers and if necessary your solicitor to ensure the appropriate relief is obtained.