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Tax relief on gains from land sales
Selling land for development can be an attractive proposition, but capital gains tax is less so! Entrepreneur’s relief may be a way of minimising loss.
When land is sold for redevelopment, there is an inevitable capital gains tax charge. What is less well known is that depending upon the structure of the sale the farmer may be able to benefit from a valuable relief from CGT, called Entrepreneur’s Relief (ER).
Following changes in the rates of CGT in 2010, the gain is now likely to be taxable at the flat rate of 28%. The more favourable rate of 10% under ER applies if the sale constitutes a disposal of part of a business, but there are specific requirements that HMRC will want to see fulfilled.
Once a specific piece of land for development has been identified, the key is to create a separate farming business distinct from the wider farming operation on the development land. This partnership arrangement allows the partners to apply for planning permission, or enter into an agreement with a developer to fund the planning fees and costs. The partnership farming business needs to be operational for a minimum of 12 months for ER to be available, and the land must be sold within three years of the cessation of the partnership.
It is crucial that a genuine farming business is created and the parties can evidence that together they are involved in the business of farming the land, rather than just recovering rents from it, which would not qualify as a business for ER. The new trading partnership should be evidenced by a partnership agreement and the development land should be held as a partnership asset and shown in the partnership’s accounts. If the land is farmed by a third party, the owner will need to decide whether the land could be brought into any partnership or, less ideally, enter into a contract farming arrangement, which should bear all the hallmarks of both parties bearing the risks of the farming business.
Given the scrutiny employed by HMRC on ER claims for development land it is essential that the correct legal and accounting structures are put in place. Contact Emma for advice.