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Our client and his wife, both now aged 55, retired from their trading operations some five years ago and have since continued to farm, in a very small way, a field of approximately ten acres. The onset of BSE in recent years has meant that the few cattle our clients kept were sold and the farming activity, therefore, has dwindled to a de minimis level.
Our client and his wife, both now aged 55, retired from their trading operations some five years ago and have since continued to farm, in a very small way, a field of approximately ten acres. The onset of BSE in recent years has meant that the few cattle our clients kept were sold and the farming activity, therefore, has dwindled to a de minimis level.
Our clients now advise us that it is just possible that the land may be acquired for development in the next year or so, and the gross proceeds are likely to be in excess of £1,000,000. Our clients have three children with whom, if necessary, they would be content to share the proceeds if by involving them this would save tax for the family. What are readers' suggestions as to the mitigation of the potential tax liability, given the de minimis activity on the farming front and the fact that options have been granted in recent years? Although there are buildings, there is no farmhouse, and the activity has been carried on for approximately fifteen years.
(Query T15,672) Sidney.
Answers:
To the extent that the parents had not exhausted their entitlement to capital gains tax retirement relief when winding up their other business interests five years ago, and trading status could be established, this would be available during 2001-02, under section 140, Finance Act 1998, to the extent of full exemption on £100,000 and half on £400,000.
The figures would be higher to the extent of £50,000 and £200,000 respectively, if a disposal by way of gift of the 'business' were made now. There would, however, be no advantage in gifting part of the land to the children in the expectation that agricultural property relief would be available if the parents failed to survive the seven-year potentially exempt transfer period, because section 124A(3)(a), Inheritance Tax Act 1984 would not have been complied with.
Although it would probably be possible to make a gift of the unsold land without incurring a charge to capital gains tax by using a holdover election under either section 165(2)(a) of, or paragraph 1 of Schedule 7 to, the Taxation of Chargeable Gains Act 1992, it would be disadvantageous to do so because the donees would start a new holding period for the purposes of taper relief under section 2A of that Act. While dividing the property between the parents and the children would produce additional annual exemptions for application against the gain made on the disposal for development, it is extremely unlikely that this would offset the loss of taper relief.
If and to the extent that the property is left in the hands of the parents, and the property were to be classified as a non-business asset, taper relief would be available at 10 per cent. It seems more likely that business asset status would be available, in which case taper would be increased to 50 per cent. The parents' marginal rate of tax would therefore be either 36 per cent or 20 per cent, as against a probability of 40 per cent for their children.
The existence of options would not affect this situation. By reason of paragraph 13 of Schedule A1 to the 1992 Act, the grant of the option does not qualify for taper relief, but that taxable event is cancelled and subsumed into its exercise, by section 144(2), Taxation of Chargeable Gains Act 1992. What matters is, therefore, that business asset status be preserved until the date of exercise if an apportionment situation is to be avoided. Farming activity should not therefore be allowed to cease during this period.
It should be remembered in this context that, by reason of sections 53(1) and 832(1), Taxes Act 1988, farming is a statutory, rather than an actual, trade consisting of the occupation of farmland for the purposes of husbandry. This status can be maintained, if necessary, by arranging for a neighbouring farmer to contract farm the land under a management agreement.
The balance of advantage is, therefore, likely to be obtained by the parents retaining the whole of the land in their ownership, taking steps to continue the statutory trade of farming and, once the money has been received from the developer, making potentially exempt transfers out of the net proceeds of sale after allowing for capital gains tax, and hoping that they survive for seven years from that date. — WJdeS.
The following options may be available:
? The land could be retained until after 5 April 2002 when business taper relief will reduce the gain by 75 per cent. In view of the de minimis level of income, the Inland Revenue may argue that the client is not carrying on a trade and therefore not entitled to business taper relief.
? Retirement relief will probably have been claimed when the client retired five years ago. If not, retirement relief continues at a reducing level until 5 April 2003.
? The client and his wife could gift an interest in the land to their children (to use their allowances and tax bands) and claim holdover relief under section 165, Taxation of Chargeable Gains Act 1992. If the land does not qualify as a business asset because of the de minimis level of income, it should qualify as agricultural property (Schedule 7 to the Taxation of Chargeable Gains Act 1992 extends holdover relief to agricultural property that falls within section 115, Inheritance Tax Act 1984). Alternatively the client and his wife could gift to discretionary trusts (which pay tax on gains at 34 per cent) an interest in the land to the value of their nil rate bands, £234,000 each, for the benefit of their children and grandchildren. These two options are unlikely to be beneficial for capital gains tax because of the loss of business taper relief.
? Shortly before a sale, the client and his wife could incorporate the business, under section 162, Taxation of Chargeable Gains Act 1992, in exchange for shares. The company would acquire the land at its current market value and sell it to the developer without a capital gain. The gain would be rolled over into the shares and the cash could be taken out of the company over a number of years to maximise allowances. In view of the de minimis income, the Inland Revenue is likely to attack this as an artificial arrangement.
If it can be shown that the client and his wife have actively continued to trade, albeit on a small scale, the best course of action is to defer a sale until after 5 April 2002 when maximum business taper relief will be available. In the meantime the farming business should be run on a commercial basis with a view to profit - renting the land out would not qualify for business taper relief. After the sale the client and his wife should consider sheltering part of the chargeable gain by investing in a venture capital trust. They should also consider lifetime gifts to their children to reduce inheritance tax.-- G.S.
