Time to build

With an ever increasing demand for new housing, more and more farmers are selling farmland for development.

For many farmers the farm has been in the family for generations and the base cost could be minimal, particularly if based on the values in 1982. Therefore, any sale of land could lead to substantial tax liabilities.

In some cases, land is sold with a gain of £200k per acre, on 50 acres the gain could be around £10 million.

In the recent past, that would not have caused too high a tax liability, due to the lifetime limit for Entrepreneurs Relief being £10 million. However, with the change in the rules to business asset disposal relief and a reduction in the lifetime allowance to £1 million, this has increased the tax liability significantly.

Based on the example above, previously the capital gains tax (CGT) liability would have been £1 million, it would now be £1.9 million.

There are ways in which this liability can be reduced, depending on what you want to do with the proceeds.

Should you decide to buy more farms, then spending £10 million on new farms, or other qualifying assets means you can pay no tax at the time. You effectively defer the CGT until the new asset is sold. However, should you choose to diversify and want to invest in property, or other assets to generate income, you cannot do this.

There is a mechanism by way there could be no tax liability on the sale of the land.

If there is an intention to invest the sale proceeds to provide an income for the owners and their family, fully incorporating the business ahead of a sale can mean no CGT is payable. If you do this, all assets pass to a company at open market value, therefore, when the land is sold by the company, there is no gain.

This option does not work if you wish to spend the money on a nice house, cars or holidays, due to the tax cost of taking the money out of the company.

However, if the proceeds were to be used to buy investment property or share portfolios, the profits can then be distributed to family members in the normal way.

Care needs to be taken when shares are gifted to other family members or sold, as the base cost of the shares will be minimal. Further, depending on what the company does, there could be no IHT relief on the whole value of the company.

If you do have development land to sell and wish to have a company to provide wealth for your family in the future, this can be a great way in which to do this, saving a lot of tax.

If you are thinking of selling some development land and would like advice in relation to the tax liabilities, please contact us.