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Julie Butler FCA looks at an important Capital Gains Tax issue for farmers.

Background

At the time of writing, capital losses and “negligible value claims” have possibly been to the forefront of the minds of many tax practitioners, stockbrokers and property developers but what of farmers and purchased milk quota?  The answer is that a negligible value claim can be made, provided the conditions are met.

What is "negligible"?

Guidance is found in CG13124 – Assets lost/destroyed/negligible value: meaning of negligible:

‘Negligible’ is not defined in TCGA92.  We take the view that it means ‘worth next to nothing’.

HMRC talk of negligible value claims being possible when market value falls below 5% of cost but of course this is just their opinion because statute does not say what negligible is.

The Quota must have been purchased in order for there to be a loss of value.

What are the mechanics of the claim?

If a taxpayer owns an asset which has become of negligible value (i.e., it is worth next to nothing) the taxpayer can make a negligible value claim, the effect of which is to be treated as if they had both disposed of the asset and then immediately reacquired it, for its value at the time the claim is made.  The deemed disposal of the asset at that negligible value will result in a capital loss.  There is no time limit for making a negligible value claim but the taxpayer must still own the asset when they make the claim.

When a taxpayer makes a claim he can, if he wants to, specify that the deemed disposal took place on another date during the two tax years before their claim is made, provided the asset was also worthless on the earlier date.  The resulting loss is then treated as arising in the tax year in which that earlier date fell.

Farmers can use the loss arising from their negligible value claim on purchased milk quota against capital gains arising in the same year, or carry it forward to be used against future capital gains.

What does TCGA 1992 say?

Whilst the definition of negligible is vague, the conditions and detail of the potential for the claim are explained clearly in the Act.

TCGA 1992 s24(2)

Where the owner of an asset which has become of negligible value makes a claim to that effect:

(a) This Act shall apply as if the claimant had sold, and immediately reacquired, the asset at the time of the claim or (subject to paragraphs (b) and (c) below) at any earlier time specified in the claim, for a consideration of an amount equal to the value specified in the claim.

(b) An earlier time may be specified in the claim if:

(i) the claimant owned the asset at the earlier time; and

(ii) the asset had become of negligible value at the earlier time; and either

(iii) for capital gains tax purposes the earlier time is not more than two years before the beginning of the year of assessment in which the claim is made; or

(iv) for corporation tax purposes the earlier time is on or after the first day of the earliest accounting period ending not more than two years before the time of the claim.

(c) Section 93 of and Schedule 12 to the Finance Act 1994 (indexation losses and transitional relief) shall have effect in relation to an asset to which this section applies as if the sale and reacquisition occurred at the time of the claim and not at any earlier time.

Practical advantages for farmers and landowners

Despite the current economic climate, farmers are still disposing of assets at a taxable gain.  For example, small parcels of land, barns for development, farmland with low base cost and general restructuring.

Farmland has maintained its value, indeed its potential sales price is considered to be double to that achieved, say, three years ago achieving prices of approximately £5,500 and £6,000 per acre.

Entrepreneurs’ Relief does not apply to the sale of “mere assets” and so with a possible 18% rate of capital gains tax looming help can be sought through negligible value loss claims to offset against the gain.

Summary

With so many asset values in turmoil, now is clearly the time for a review of all farming assets, especially property with regard to values and possible tax planning.  The potential utilisation of the loss claim on milk quota must not be overlooked when realising capital gains.