Replies to Queries - 4 - Tenant purchase

We have recently purchased our previously tenanted farmhouse, buildings and land at some 50 per cent of its apparent market value, which reflects my forty-year tenancy.

The purchase has been made jointly by myself and my wife, although the farming activity has always been in my sole name.

We now have the opportunity to dispose of some obsolete buildings for a sum which, based on the 'discounted' purchase price, will produce a large capital gain. At the age of 62 I was not planning to retire from farming!

It has been suggested that it is possible for the discounted purchase price to be uplifted by all or part of the 'tenant right discount', thereby reducing the capital gain. Is any reader able to provide information on this? Is the change from sole tenant (prior to purchase) to joint owner (after purchase) detrimental? We assume that, in any case, a sale in two parts either side of 5 April would help.

(Query T16,115) - Barnman.

Had the freehold been transferred into the husband's name alone, the position would have been as follows:

The tenancy itself granted to him in 1962 is not, in practice, treated as an annual one under paragraph 1(5) of Schedule 8 to the Taxation of Chargeable Gains Act 1992, the provisions of paragraph 8(2) notwithstanding. Instead the Revenue's analysis has been to look at the right to protection under Agricultural Holdings Act as an asset for which the anticipated life expectancy of the husband in 1962 would have been applied under section 44(3). This would have produced non-wasting status for that asset and therefore in effect the tenancy itself. The husband would therefore have had a non-wasting asset on 31 March 1982, which would presumably have been valued on the Baird basis (Baird's Executors v Commissioners of Inland Revenue [1990] SVC 188) at 25 per cent of vacant possession value at that date. This would have been more than doubled in value by indexation to 5 April 1998.

Upon the purchase of the freehold reversion, this asset would have merged, giving rise to a composite base value of that figure plus the price (and expenses) paid for the freehold, by reason of the provisions of section 43. The end result may well have been rather similar to the (postulated) current vacant possession value of the farm, albeit not so arrived at. The issue is one for a qualified valuer.

But the effect of having the freehold reversion transferred into joint names (it is not stated whether, beneficially, there is a joint tenancy or tenancy in common) is that there is no automatic merger of the protected tenancy with it, thus excluding the operation of section 43.

Indeed, unless steps have been taken to terminate the tenancy, it will have remained in existence, with rent continuing to be payable and taxable under Schedule A. It seems likely, however, that a surrender by operation of law may be postulated. On that assumption:

The farmer will need to ask the selling agent to do the necessary calculations, but if a gain is likely to result, then selling different properties either side of 5 April would enable four annual exemptions to be claimed (one for each spouse for 2002-03 and 2003-04).

Furthermore, on the basis of the above analysis, business asset taper on the basis of a 1998-owned asset might even be contended for. The effect of section 43 on section 2A(4), Taxation of Chargeable Gains Act 1992 is, however, very far from clear. - JdeS.

The first step as in all capital gains tax calculations is to identify the asset being disposed of. Here 'Barnman' and his wife have a choice! If, as is assumed to be the case, the freehold interest (subject to 'Barnman's' tenancy) in the farmhouse, farm buildings and farmland were acquired at the same time, the whole of the land and buildings would be treated as one asset for capital gains tax purposes, and the sale of the barn will be a part disposal of that larger asset. Conversely, 'Barnman' and his wife could treat the barn as a separate asset, following Statement of Practice D1. Normally, using the statutory part disposal method will produce the higher base cost but calculations should be prepared using both methods, if necessary engaging a valuer to provide the appropriate valuations, to confirm this.

Ignoring the transfer between 'Barnman' and his wife for the moment, the base cost of the land and buildings as a whole will be the value of 'Barnman's' tenanted interest in the land as at 31 March 1982 or at the date he acquired it, whichever is the greater. This is likely to be the March 1982 value unless, unusually, 'Barnman' paid a premium for acquiring the tenancy. The March 1982 value is likely to be based on either a capitalised rental value following Walton v Commissioners of Inland Revenue [1996] STC 68 or a percentage of the vacant possession premium (the difference between freehold vacant possession value and tenanted value) following the Baird case [1990] SVC 188). Although these cases were concerned with valuations for inheritance tax purposes, the same principles may be applied for capital gains tax. Unless there is evidence that the landlord and tenant wished to release the vacant possession value as at 31 March 1982, it seems likely that the capitalised rental method will have to be followed and this may produce a low value. An experienced valuer conversant with the principles to be adopted for valuing agricultural tenancies should be instructed.

To the base cost may be added the cost of acquiring the freehold interest. This will qualify as enhancement expenditure following section 38(b), Taxation of Chargeable Gains Act 1992, as it is expenditure that is reflected in the state or nature of the asset at the time of disposal.

The transfer of half the interest in the land and buildings from 'Barnman' to his wife will be a no-gain/no-loss transfer following section 58, Taxation of Chargeable Gains Act 1992. For all practical purposes, when the barn is sold the base cost of the half share owned by Mrs 'Barnman' will be the same as 'Barnman's' acquisition cost. It is assumed that the mechanism used to put a half share of the freehold in the wife's name also resulted in the tenanted interest formerly held by 'Barnman' merging with the freehold, so that his wife does not now hold a half share in the freehold subject to 'Barnman's' tenancy. If the point was not dealt with when the freehold was acquired, it should be addressed before the barn is sold.

For taper relief purposes where freehold and leasehold interests in land have merged prior to a disposal, the qualifying holding period for the new merged asset starts when the first interest in the asset was acquired (paragraph 14 of Schedule A1 to the Taxation of Chargeable Gains Act 1992). For the purposes of the qualifying holding period therefore, both 'Barnman' and his wife will be treated as having held the asset as at 17 March 1998. 'Barnman's' half share in the barn will be eligible for taper relief at the business asset rate if at any time during his period of ownership the barn has been used for the purposes of a trade carried on by him (paragraph 5(2)(a) of Schedule A1 to the Taxation of Chargeable Gains Act 1992.

For the period before the no-gain/no-loss transfer, the asset will qualify as a business asset in the wife's hands if the business asset test can be satisfied by 'Barnman' during that period (paragraph 15(4) of Schedule A1 to the Taxation of Chargeable Gains Act 1992). The wife's half share in the barn will not qualify as a business asset after the date of the no-gain/no-loss transfer and before the date of sale, as she is not using the barn for the purposes of a trade during that period. Her share of the gain may therefore need to be apportioned following the provisions of paragraph 3 of Schedule A1 to the Taxation of Chargeable Gains Act 1992.

The Inland Revenue regards periods when an asset is not used at all as periods of non-business use. The use of a barn in a farming trade, however, may be essentially passive and/or intermittent. Passive use may be for storage of dead stock or machinery, and intermittent use may be for the storage of harvested crops, or housing of animals in winter months, or for milking or lambing. Such seasonal or intermittent use is normal in farming trades, and periods when the barn is not actively in use should not be treated as non-business use. The author has successfully argued this point with the Revenue.

As noted above, the joint purchase of the freehold interest by husband and wife produces no disadvantages, apart from the possible loss of business asset taper relief for the period from the wife's date of acquisition to the date of disposal of her half share of the barn, and there are other advantages that may cancel this out. These, as 'Barnman' has identified, are the addition of the wife's annual exempt amount for one, or more years if disposals take place in more than one tax year. - Hayloft.

Extracts from further replies received:

Providing they are both happy with the legal and commercial implications, the husband and wife could institute a partnership as soon as possible. This should be put in place with a formal partnership deed. They must also notify business associates, including their bank, trade suppliers and customers. The VAT registration must also be changed.

The effect of this action would be to create a mixed use of the buildings for 'Barnman's' wife for taper relief purposes. The gain would be time apportioned between the business use after she became a partner and the non-business use prior to that date (paragraph 3(2) and (3) of Schedule A1 to the Taxation of Chargeable Gains Act 1992).

The alternative is to consider whether the wife could reasonably have been treated as an employee of 'Barnman'. As an employee, she can also qualify for business asset taper relief if the asset in question has been used by her employer in his trade. Section 67, Finance Act 2000 permitted this condition to be applied to part-time employment. Perhaps her pay could be applied retrospectively - provided it is paid within nine months. Maybe her wages would be below the limit for applying PAYE, but ideally a signed P46 should be held by 'Barnman' as her employer. The wife's pay must then, of course, be reported on her tax return.

For both of the above options, there must be genuine duties carried out by 'Barnman's wife. - AM.

The tax position of Mrs Client, although not nominally a trader, is based on the fact that she has been a part of the business throughout her marriage. It is a fact of farm life that every member of the family works on the farm to some extent, even children. Between fruit picking, stock feeding, egg collection, and helping with haymaking or the harvest, children are variously involved. If a runt calf or piglet is born, or there is an orphaned newborn, or if a ewe has triplets (a ewe can only feed twins), a side-lined animal must be brought into shelter, often the kitchen, and fed until it is weaned and can return to the flock, herd or sty.

The average farm wife raises more quadruped orphans than she does children. A little research into the life of Mrs Client should yield abundant material to support her claim to be involved in the business or employed by it.

- Man of Kent.

Editorial note: It is apparent that the joint ownership causes complications. The taper relief problem would be solved if the wife transferred the obsolete buildings into the husband's sole ownership; in that event the rule in paragraph 15(2) of Schedule A1 to the Taxation of Chargeable Gains Act 1992 would allow the husband's use of them for business purposes to decide the taper treatment from original acquisition date.

Issue: 3884 / Categories: