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A and his mother have held joint interests in the freehold of farmland, the farmhouse and farm buildings, including a dairy complex. The active farm business has for more than ten years been run by a partnership of A, his wife and his mother, without payment of any rent for use of the agricultural property. The farmhouse was vacated by A's mother in 1978 and has since been occupied by A and his wife. They intend to leave shortly, when the property will be sold.
A and his mother have held joint interests in the freehold of farmland, the farmhouse and farm buildings, including a dairy complex. The active farm business has for more than ten years been run by a partnership of A, his wife and his mother, without payment of any rent for use of the agricultural property. The farmhouse was vacated by A's mother in 1978 and has since been occupied by A and his wife. They intend to leave shortly, when the property will be sold.
Following discontinuance of dairying and sale of the milk quota in May 2000, the land occupied by the dairy was cleared and sold with planning consent in November. As this disposal, under Jarmin v Rawlings [1994] STC 1005, is a sale of part of the business, it qualified for retirement relief. Might two further proposed disposals by A's mother of her half-interests to his wife similarly qualify for relief, given that they would be within three years of the cessation of dairying and be of assets neither used nor leased since then? The proposed disposals consist of:
(1) A silage barn, adjoining the former dairy plot, rendered surplus to current beef farming requirements by the above cessation.
(2) The farmhouse, unused by the donor since 1978.
Although we are hopeful there will be consensus over eligibility to relief in case (1), we are very doubtful if capital gains tax can be relieved (other than by taper relief) or avoided in case (2).
(Query T15,879) – Giles.
In cases where a business is carried on in partnership, the business is treated for retirement relief purposes as though it is owned by each partner. Additionally the disposal of the whole or part of a business by a partner includes a disposal of an interest in partnership assets (section 163(8), Taxation of Chargeable Gains Act 1992).
If the partnership trade ceased in May 2000 when the dairy herd was sold, the partners have, for retirement relief purposes, twelve months from that date to dispose of assets that were, at that date, in use for the purposes of the business (section 163(2)(b)). The Revenue has discretion to extend this period of twelve months, and will in practice extend it to three years if the asset was retained at the time the business ceased and was not used or leased before the time of disposal. An extension may also be available if any use or leasing came to an end during the initial twelve-month period (Inland Revenue Capital Gains Tax Manual at paragraph 63582).
The questions to be addressed therefore are: were the farmhouse and the barn used for the purposes of the trade that ceased in May 2000; were they in use for the purposes of that trade in May 2000; and have they remained unused since then (or at least since some time in the twelve months following)?
The barn may be capable of fulfilling those conditions, but the farmhouse will not, except to the extent that parts of it have been used exclusively for business purposes. It is unlikely that any part has been used exclusively for business purposes unless there is a room set aside as a farm office that has been used for no other purpose. Any apportionment agreed for the use of the farmhouse for income tax purposes is likely to be irrelevant, as it is unlikely to be wholly based on exclusive use of parts of the farmhouse for business purposes.
I assume in replying that both mother and son have not exhausted their entitlement to retirement relief as a result of the gain arising on the disposal of the dairy business in May 2000.
It is assumed also that the son's share of any gain arising on the sale of the farmhouse will qualify for private residence relief (section 222, Taxation of Chargeable Gains Act 1992). The mother's last three years of ownership may qualify for relief under section 222, if she occupied the farmhouse as her main residence for any period, even if she has not occupied the farmhouse as her main residence for any periods since 31 March 1982. The relevance of the restriction in section 223(7) is to limit the effect of non-qualifying use of the dwelling house to periods since 31 March 1982. However, because section 223(7) applies only for the purposes of section 223, relief will still in principle be available if the only time the dwelling house was occupied as the only or main residence fell before 31 March 1982, i.e there is a gain to which section 222 applies (see Tax Planning for Private Residences by Matthew Hutton, third edition, paragraph 2.62). – Taxplanet.
Section 163(2)(b), Taxation of Chargeable Gains Act 1992 recognises a disposal of assets which, at the time a business ceased, were in use for the purposes of that business.
Section 163(4)(c) of the Act recognises a disposal of assets as material if (inter alia) the date on which the business ceased falls within the permitted period before the date of the disposal, normally one year. So far as concerns the silage barn, as a year from May 2000 has already elapsed, the possible extension of time (beyond one year) allowed by paragraph 1(2) of Schedule 6 to the Act requires Revenue agreement.
As suggested by 'Giles', the discontinuance of dairying should constitute a part disposal, so that the sale of related land within twelve months should qualify for relief. In Wase v Bourke [1996] STC 18 the sale of related milk quota within twelve months of the end of dairy farming was only denied relief because the taxpayer had not at the earlier date reached the qualifying age. In Jarmin v Rawlings the Revenue argued that dairying activities could not be distinguished from the totality of farming operations and, also, that an interval existing between contract of sale and completion barred the recognition of circumstances at the two dates as integral to one another. The latter difficulty has been overcome by Inland Revenue Extra-statutory Concession D31.
Relief for the farmhouse depends on sale concurrently with the residual business ceasing. – Elder.
Extract from reply by 'Hodgy':
As the gifts have not yet occurred, planning is possible. My recommendation is that at the same time as transferring the two assets to her daughter-in-law, the mother should transfer the remainder of her interest in the farm to either her daughter-in-law or her son or to other family members if that would be her wish. Given that the house is to be sold on, the mother could also receive some consideration from the son and daughter-in-law and for that to be left on loan account to replace her entitlement to a share of the profits (if there are any) of the partnership. By consideration of the interaction with gift relief, the consideration can be set at a level so that any gain is covered by retirement relief.
An issue to consider will be inheritance tax and in particular agricultural property relief. 'Giles' will need to make sure that by planning for capital gains tax his clients have not been left with a large inheritance tax bill if the mother dies within seven years of the gift. In particular, a loan to the partnership as opposed to a capital account will not qualify for agricultural property relief.
