Despite the recession there has been a sustained need for housing and pressure on farmland to be sold for development. Land prices have also increased substantially over the last ten years. When land and property is sold capital gains tax (CGT) is chargeable on the difference between the proceeds received and the cost of the property when purchased, or value when inherited. Therefore, the capital gains realised by farmers, particularly when land is sold for development, are often substantial.
Entrepreneurs’ Relief (ER) is a very valuable relief from capital gains and reduces the rate of CGT on “qualifying business disposals” from 28% to 10%. Originally ER was capped at a maximum of £80k but this has since risen to £1.8m per owner. Therefore ER should not be ignored and should always form part of the planning process in contemplation of the future sale.
The ER legislation is complicated and full of pitfalls. Therefore it requires some thought and planning before any contracts are signed. This significant tax relief means that, wherever possible, individuals should be looking to structure the sale of businesses and assets to ensure that the relief is maximised. Failing to do so can be costly in terms of additional tax.
Amongst other rules, to qualify for ER, you need to either cease, or sell your farming business before you sell the farm land. Often farmers are reluctant to give up farming completely, however there are methods of stopping the farming activity for ER, whilst the family can also continue farming.
In one recent case, one of our clients, who farmed as a sole trader, had been approached to sell 5 acres as part of a local development for housing. The sale of this land was going to be at a rate of £150k per acre, or £750k for the sale of the field. In practice the farmer was not ready to hang up his boots so if no tax planning had taken place ER would not be available and CGT of £205k would be payable on the sale of the land.
We have a close relationship with the farmer, and the farmer did the right thing speaking to us before the land was sold. We then put some thought into how the business could be structured for the future, and also achieve ER. Our recommendation in this case, was for the farmer to cease farming, by selling his farming business to a limited company. As the farmer had stopped farming as an individual, he also achieved ER on the sale of the farm land. The farmer continued his farming business through his limited company.
The subsequent CGT bill was reduced by £131k to £74k, which is an enormous saving.
All this tax planning and the business transfer had to take place before the sale of the land. In addition, the sale of land to developers often involves exclusivity agreements and options for sale, which complicate matters. Often we need to insert additional clauses into such agreements to give us time to plan the business structure, so we need to know at an early stage, that land sales are being planned.
In another case we act for a husband and wife, who farmed in partnership and decided to sell up and retire from farming. They put the farm up for sale and agreed a sale of the land and buildings in the spring of 2012 for £3.5m. They had arable crops in the ground and agreed to exchange contracts for the farm sale in April. The farm sale was designed to complete in September after harvest.
In most circumstances, for tax purposes, the sale of property happens upon exchange of contracts. In this case the farmers were selling the land in April, which was before they were ceasing farming in September. This means that there was doubt whether ER would be available.
Our advice was for the farmers to sell the crops in the ground on the same day that they exchanged contracts for the sale of the farm. The farmers agreed and we advised their solicitors what was required, including changing the wording of the contract.
The tax saving achieved in this case was over £300K. Not only that, the farmer had the delight of selling his crop In April 2012, when it was looking fantastic, and did not have to undertake a soggy harvest in the September. We could not plan for the weather; however we can plan to save the CGT!
Sam Kirkham 01823 286096