Enter Your E-mail

Julie Butler asks if the current generous tax reliefs for Inheritance Tax and Capital Gains Tax will be available for transferring property to the next generation.

Introduction

With more development potential for land and buildings now presenting itself, serious tax planning will be needed and the £10 million limit for Entrepreneurs’ Relief (ER) may be increasingly relevant.

The restrictions on ER are fairly onerous with regard to the fact that it doesn’t apply to let property, nor to a mere disposal of an asset. The disposal must be the whole or part of the business and therefore it is increasingly likely that the owners of the property will turn to rollover relief as an alternative to ER.  However, rollover relief has its own problems in many cases, in that it is restricted via the rules for mixed use or partial use where there has been non-business use for a while, for example a property which has been let, or where there has been private use, etc., and this can be restrictive.  It can also be difficult to find enough property to meet the criteria.  However, perhaps the twist in the tax planning tail relates to the availability of CGT holdover relief for agricultural value.

The Advantages of Holdover Relief

In order to qualify for holdover relief, the transaction is limited to a transfer at undervalue, normally to a family member. In looking at whether the land and building is agricultural property, guidance is given in TCGA 1992 s 115(2):

“agricultural land or pasture includes woodland and any building used in conjunction 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 cottages, farm buildings and farmhouses together with land occupied with them as are of a character appropriate to the property”. 

The Use of Agricultural Property

In order for potential development land that has been used for agriculture to be passed down to the next generation the asset simply has to comply with the holdover relief provision of being agricultural property and having been used for an agricultural purpose and being occupied in the correct way.  However, the asset does NOT have to meet the stringent requirements of rollover relief where there are restrictions for, as already mentioned, partial business use of development land, 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. (For example, where some of the land and/or buildings have been let out during the current ownership).

The Problems with Rollover Relief

With the onerous provisions of rollover relief and ER there is a temptation with potential development land to pass it down to the next generation using the holdover provisions for agricultural property and then wiping this land clean of those problems, i.e. periods when the land was let, periods when it was used for private use. Then in the hands of the next generation one can ensure that there is the required minimum period which is only one year of business use; then ER and the attractive 10% rate of Capital Gains Tax can be available. When this is compared to the much more onerous rates of 18%/28% of Capital Gains Tax which apply more generally, then this can be very attractive.

This could, for example, apply where some land has become available for development that was part of a main farm. It can be transferred to the next generation at a time when it would not qualify for ER, for example it is let up to the time of transfer. 

Anti-Avoidance Provisions

Obviously transactions of a large value could prove problematic. Any anti-avoidance procedures that HMRC would be likely to put in the way to challenge such a disposal must be considered.  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 will 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 ITA 2007 s 756 and a suggestion that the land was 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 ITA 2007 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 and there would be strong arguments to present to HMRC.

Inheritance Tax (IHT)

Obviously such a transfer should qualify for APR but consideration must also be given that a District Valuer (DV) would probably try to value this property at a high value for its "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 would be problems under the BPR provisions.  However, this could be where the “Nelson Dance” case would come into play, depending on the full facts, and the provisions of such a transfer being tested by reference to the transferor’s estate. Note also the recapture of BPR and APR on the decease of the transferor after the land has been sold by the transferee.

With the Office of Tax Simplification (OTS) saying in March 2011 that HMRC are going to review IHT, is this a good time to look at passing to the next generation?

Loss of Uplift in Value

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 transferor had disposed of the development land directly.  If the transferor were elderly it could be argued that a lifetime transfer would not benefit from the CGT uplift on death. However, there would be various concerns as to whether the land would qualify for full IHT relief and what HMRC would do with the hope value.

Action Plan

Where there is development land which is tainted with criteria which could potentially disqualify certain disposals for the purposes of ER, there are distinct potential opportunities in using holdover relief to transfer to the next generation so that there is a “clean product” that may then be disposed of, being able to use holdover relief and then ER with the next generation and the advantage of the favourable 10% tax rate without problems.