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|Cleansing of Potential Development Land using Holdover Reliefs|
Julie Butler FCA of Butler and Co outlines a possible action plan involving potential development land which has been used for agricultural purposes.
With more development potential now presenting itself for agricultural land, serious tax planning will be needed and the £5million limit for Entrepreneurs’ Relief will be looked to.
The Problems with Entrepreneurs' Relief and Rollover Relief
The criteria for Entrepreneurs’ Relief are fairly onerous: there are restrictions if property is let; there cannot be a mere asset disposal but it must be the whole or part of a business and therefore it is possible that land owners will turn to Rollover Relief as an alternative to Entrepreneurs’ Relief. However, Rollover Relief can also be problematic in many cases in that it is similarly restricted as regards mixed use or partial use, or where there has been non-business use for a while. It can also be difficult to find enough property that meet these criteria. However, perhaps the twist in the tax planning tail relates to the availability of CGT Holdover Relief.
Holdover Relief is limited to a transfer at undervalue, normally to a family member. In looking at whether it is eligible agricultural property which is being transferred, guidance is given in IHTA 1984 s 115(2): [by virtue of TCGA 1992 s 165 (5) and Sch 7, assets qualifying for Agricultural Property Relief are also eligible for CGT Holdover Relief - Gifts of Business Assets]:
“agricultural land or pasture... ...includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property”.
Therefore, in order for potential development land that has been used for agriculture to be passed down to the next generation, it simply has to comply with the Holdover Relief provision of being eligible agricultural property, having being used for an agricultural purpose and being occupied in the correct "way". However, it does not have to meet the stringent requirements of, say, Rollover Relief where there are restrictions for, as already mentioned, partial business use of assets, i.e., where the land that is part of the Rollover Relief claim contains areas that qualify for business use and areas not used for the purpose of the trade. Guidance in relation to Rollover Relief is found in TCGA 1992 s 152(6) where for the period of ownership, or any substantial part of the period, part of a building, structure or area is not used for the purpose of the trade. Where there is mixed business and non-business use of development land for rollover relief, there is restriction and this is covered in TCGA 1992 s 152(7). This deals with the situation where at some stage within the ownership period there is no qualifying use whatsoever.
The period of ownership cannot commence earlier than 31 March 1982. It is generally accepted that the apportionment of costs and disposal proceeds will be undertaken on a just and reasonable basis for this mixed business use, i.e., between business use and non-business use.
With the onerous provisions of Rollover Relief and Entrepreneurs’ Relief there may be a temptation with potential development land, to pass it down to the next generation using the holdover provisions for agricultural property and effectively starting again with a clean slate, i.e., circumventing prior periods when the land was let, periods when it was used for private purposes, etc. In the hands of the next generation one can ensure that there is the required period of only one year's business use: then Entrepreneurs’ Relief and the attractive 10% rate of Capital Gains Tax can be available. When this is compared to the much more onerous 28% 'standard' Capital Gains Tax rate, this is very attractive.
This could, for example, apply where some land has become available for development that was part of a main farm. It could be transferred to the next generation at a time when it would not immediately qualify for Entrepreneurs’ Relief, for example it had been let up to the time of transfer. Under, say, a farm business tenancy the tenant could be given notice so that the property was clear, transferred at the end of the tenancy to new ownership so that it qualified for Entrepreneurs’ Relief as to the entirety of the business then conducted on the land, and subsequently be disposed of after the one year qualifying period.
Tax Issues to Consider
Obviously transactions of a large value could cause problems. Inheritance Tax implications must be considered, as must any anti-avoidance procedures that HMRC might be likely to put in the way to challenge such a disposal. The transfer to the next generation when dealing with the disposal afterwards might be picked upon by HMRC as trading in land and/or a transaction caught under ITA 2007 s 756 which would tax the capital profit as income. The terms of this section encompass a transaction where land is developed with the sole or main object of realising a gain from disposing of the land when developed, and where land is acquired with the main object of realising a gain from disposing of it. Clearly the motives for passing the property down to the next generation must be thought through. Arguably one defence to both a charge under s 756 and a suggestion that the land is acquired as trading stock is that the transferees are passive recipients of a gift. As such most of the badges of trading are absent, and equally a s 756 motive to sell quickly at a gain cannot be automatically imputed to them. In theory it might be more reasonable to apply s 759(6) by which the gain can be taxed on a person providing the opportunity for it to be realised, (the transferor), but the transferor never acquired the land to realise a gain from it, and so that would seem unduly harsh.
The next issue to consider is that of Inheritance Tax. Obviously this would qualify as a transfer for Agricultural Property Relief but consideration must also be given that a District Valuer would probably try and value the property at a high value for the hope value, i.e., when it is transferred as agricultural property from one generation to the next using Holdover Relief, this would be a lifetime gift for Inheritance Tax purposes. However it would have to be capable of achieving APR and BPR, to cover for the possibility of the transferor not surviving the gift for 7 years. If it is let property there could be problems under the BPR provisions. However, this could be where the “Nelson Dance” case might come into play, depending on the full facts, and the provisions of such a transfer being tested by reference to the transferor’s estate. [ For further information on the extremely useful Nelson Dance case, see Anthony Nixon's article Inheritance Tax and Business Property Relief - a New Opportunity - Ed. ] Note also the recapture of BPR and APR on the decease of the transferor after the land has been sold by the transferee.
There would obviously be a loss in the uplift of value, in that the base costs that would have to be used by the next generation disposing of the land would be the original base costs for the family but then that would be no different than if the transferors had disposed of it. If they were elderly, I suppose it could be argued that by transferring to the next generation, there would not be the CGT-free uplift on death. However, there might be various concerns as to whether the land would qualify for full Inheritance Tax reliefs and what HMRC would do with the hope value.
So that then really rests on the second disposal when Entrepreneurs’ Relief is claimed. Would there in actual fact be an attempt to use section 756 by HMRC? In this regard it might be fair to say that any development project would probably take a long time and it might then be difficult to argue that there were any immediate, certain or direct "quick fix" advantages to such a transaction.
Where there is development land which is tainted with qualities which would make it difficult to claim Entrepreneurs’ Relief and difficult to claim Rollover Relief there are certainly possible advantages to using Holdover Relief to pass property to the next generation so that there is a "clean product" which might then be sold, taking advantage of Entrepreneurs’ Relief and the corresponding 10% Capital Gains Tax rate without problems.
About The Author
Julie Butler FCA
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd edition) and Equine Tax Planning ISBN: 0406966540. The third edition of Tax Planning For Farm and Land Diversification will be published shortly.
Article Added Sunday, 12 December 2010 | 1545 Hits