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We act for a family butchers (father and son) who rent some farm buildings from the son and wife for cattle. The rest of the buildings are also rented to another farmer.
The long-term intention is for the buildings to be developed for houses and we are seeking to maximise business asset taper relief on any ultimate sale. Since the wife is not in business, then if the partnership purchased the buildings at fair value and continued to receive the rent for at least four years, would this achieve the objective?
We act for a family butchers (father and son) who rent some farm buildings from the son and wife for cattle. The rest of the buildings are also rented to another farmer.
The long-term intention is for the buildings to be developed for houses and we are seeking to maximise business asset taper relief on any ultimate sale. Since the wife is not in business, then if the partnership purchased the buildings at fair value and continued to receive the rent for at least four years, would this achieve the objective?
Alternatively, if the wife came into partnership, would this have the same effect?
Readers' comments would be appreciated.
(Query T15,864) – Advisor.
Paragraph 5 of Schedule A1 to the Taxation of Chargeable Gains Act 1992 determines, in the case of the disposal of any asset other than shares in a company, whether the asset disposed of was a business asset, at a time after 5 April 1998 and before its disposal. Subsection (2)(a) of paragraph 5 notes that where the disposal is made by an individual, the asset is a business asset for any periods when it is being used, wholly or partly, for the purposes of a trade carried on by an individual, or by a partnership of which the individual was a member.
Part of the buildings is used in a trade carried on by the son, in partnership. His share of the fraction of the gain attributable to the part of the buildings used in the partnership trade will therefore qualify for taper relief at the business asset rate (assuming it has been so used at all times since 5 April 1998 and will be so used up to the date of sale). The same will not be true of his mother's share. Her share of the gain, attributable to this part of the asset, will only qualify for taper relief at the lower non business rate, as she does not use the asset for the purposes of a trade that she carries on either alone or in partnership.
'Advisor' suggests selling the business to the partnership. A sale would not be necessary. If the wife gifts her share of the buildings to her husband, the transfer, as it is between spouses, is at no gain/no loss. In these circumstances paragraph 15(4) of Schedule A1 to the Taxation of Chargeable Gains Act 1992 acts to grant business taper relief to the husband for the combined period, since 5 April 1998, when the asset has been owned either by him or his wife, and used in the trade carried on by the partnership of which he is a member.
Introducing the wife into the partnership would not produce the same result. The gain attributable to the part of the asset owned by her, and used in the partnership trade, would qualify for business taper relief only as far as the gain was attributable to periods after she entered the partnership and prior to sale. The taper position for gains attributable to periods before she entered the partnership would be unchanged, and the lower non-business rate would be due in relation to this part of the gain.
The fraction of the gain, attributable to the part of the buildings let to the farmer, will not qualify for taper relief at the business asset rate, for anyone, unless unusually the farmer trades as an unlisted company. If he does, the part of the asset he uses in his trade qualifies as a business asset, for any owner of the property, by virtue of paragraph 5(2)(c) of Schedule A1 to the Taxation of Chargeable Gains Act 1992. There need be no link at all between the owner of the asset and the trading company for the asset to qualify in this way. – Taxplanet.
In order to qualify for business asset taper relief, the property must come within the terms of paragraph 5 of Schedule A1 to the Taxation of Chargeable Gains Act 1992. This paragraph sets out the circumstances in which an asset can be a business asset and so qualify for the higher rate of business asset taper relief.
The main two areas of opportunity are that an asset used for the trade of a partnership of which the owner of the asset is a member is a business asset. In addition, an asset used for the trade of an unquoted company is a business asset, although this rule was widened from the previous position with effect from 6 April 2000 and so some apportionment for taper relief could be necessary.
We need to deal separately with the part of the buildings let to the family business and the part let to the other farmer.
For the part let to the family business, the half of the property owned by the husband qualifies for business asset taper relief as it is used in the trade of a partnership of which he is a member. As the wife is not a partner, her interest in that part of the building does not qualify for business asset taper relief. The spouse could become a member of the partnership and so ensure that her share of any gain qualifies as a business asset. However, this would only be from the date that the spouse became a partner and one would have to apportion the gain.
Another possibility is for the family business to incorporate, as the building would then be rented to an unquoted company. Thus it would qualify as a business asset for both the son and his wife. Once again, this would only apply from the date that the property is being rented to a company.
In order to maximise the claim for taper relief, it might be best if immediately after the incorporation, the property was transferred to self-interested interest in possession trusts by the son and his wife. This would reset the taper clock to zero and avoid any apportionment. Thus if the property was held for four years (or two years if the proposed relaxation of the rules is enacted in the Budget in March 2002) there will be a full entitlement to 75 per cent business asset taper relief for both the son and his wife.
For the part let to the farmer, options to secure business asset taper relief are limited. As a first stop, could the lease to the farmer be terminated and then the buildings be used by the family business after taking the above action?
Alternatively, is the tax at stake such that the son and his wife might be able to persuade the farmer to incorporate his business by reducing the rent for the buildings? – Hodgy.
