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TaxationWeb by Julie Butler, FCA

Julie Butler FCA, of Butler & Co, considers opportunities for farmers to take advantage of business asset taper reliefThere are many ways in which today's modern farmer can diversify and create development opportunities on and within the land they own. The use of Business Asset Taper Relief greatly aids today's diversifying farmer and there are many opportunities in which the farmer can make use of this very beneficial relief.

Business Asset Taper Relief

Business Asset Taper Relief (BATR) legislation has resulted in an attractive maximum capital gains tax rate of 10% (75% followed by a 40% tax rate) from 6 April 2002 [TCGA 1992 Sch A1, para 5(1A)]. The farming community have enjoyed (and should still enjoy) some very attractive tax shelters from the trade of farming where farmland has been sold for development. The alternatives are endless for a farmer who wants to continue to be able to shelter future development gains.

Mixed-use/Dual use of an asset and Business Asset Taper Relief

From 6 April 2004 (under FA 2003 s160) let land qualifies for BATR but what about the periods before 6 April 2004?

In order to claim the 75% BATR (100% BATR eligibility), the assets must have been used only for business use from 6 April 1998.

The tax position of let farmland prior to 6 April 2004 is complex. From 6 April 1998, the landowner had to be in partnership with the tenant to qualify for BATR. From 6 April 2000 it was sufficient for the land to be let to any unlisted trading company (the aim of the tax planning has to be to achieve 'pure' taper relief so as to minimise the capital gains tax payable).

When an asset is simultaneously used for more than one purpose, one of which would qualify the asset as a business asset and the other would not as a business asset, there is 'mixed use'. In a farming situation, a typical example would be where a farmer who is a sole trader owns a barn and one part of it is used for the purposes of the farm and the other part is let out.

Where either of the above applies, TCGA 1992 Sch A1 para 9 introduces an apportionment calculation. This is a very complex calculation where it is necessary to calculate the relevant fraction of each mixed-use period for which the asset is used for a non-qualifying purpose. Such a calculation shall be made on a just and reasonable basis. The relevant fraction represents the proportion that uses the asset for non-qualifying purposes.

It is essential to identify mixed-use assets and inform the client before the disposal. This is of most relevance where there is a potential disposal at a large gain (for example, for development).

Agricultural land with hope for development lends itself to tax planning to improve on this position. There is scope to transfer the land into new ownership to try and ensure that full untainted taper relief is achieved after 2 years, there is scope to transfer into new ownership, e.g. a new trust to try and ensure the full untainted taper relief is achieved after 2 years.

Until 6 April 2004 let land did not count as the trade of farming. Let land that qualifies now will still be 'tainted'. It will have mixed use since it did not qualify for the 75% relief before 6 April 2004.

Examples of how to achieve pure taper relief would be to transfer the land into a trust (or advance from one trust to another). FA 2004 stops this from December 2003, if the settler is 'invested' in the trust it is better to consider outright gifts now (there is a ruse using transfers of partial interests to spouses which later merge). The gain can be held over and the land held for a two-year period and hopefully qualifying for 100% BATR before the land is ultimately sold out of the family for development or otherwise.

Farmers trading in land

Where land is sold for development realising a capital gain, the Revenue may seek to apply TA 1988 s 776 rather than capital gains tax legislation. HM Revenue & Customs are not saying that the farmer is trading in land, but developing with 'the sole or main object of realising a gain from disposing of development land'. It is more beneficial to the Revenue & Customs to tax the profits in this way.

A formal Revenue & Customs clearance procedure is available in respect of transactions potentially falling within points 1 or 3 of TA 1988 s 776(11), however this is rarely used in practice.

Should the landowner become a developer for tax purposes (voluntarily or involuntarily), land previously held as a farm asset will be appropriated to the trading stock of the new trade. On this change of status CGT arises on a deemed disposal at market value (TCGA 1992 s 161). Tax planners should try and ensure that all the CGT reliefs are utilised on the deemed disposal. The question of sheltering development profits from tax can attract the 'reluctant farmer' into the farming world in order to take advantage of the tax relief.

Retaining rights over the land

Commercially, it may be beneficial to retain some right over the land in order to keep some control over future development. Ransom strips or covenants can be used to protect the landowner. Ransom strips result in part disposal rules. Covenants are a capital asset and so again result in a part disposal. Their value will be difficult to ascertain, and so will have negligible cost.

Sale of land to a developer – not trading in land

A farmer who has owned land with no intention of selling does not become a property developer just because he takes steps to enhance the value of the property to the developer who might want to acquire the land (Taylor v Good [1973] STC 383). Development is not defined by statute. The Revenue & Customs interpretation is any physical adaptation or preparation for new use of land.

The increase in value created by planning consent, representing the difference between agricultural value and development value, can raise problems if matters are not thought through first.

Owner of tenanted land with development value

Prior to 6 April 2004 before FA 2003 s 160, tenanted land with development value will constitute a non-business asset for taper relief purposes – not much help if the land later gets sold for development. It would probably be possible to offer an incentive to procure a surrender of the tenancy. Such a transaction should not be entered into without the help of a lawyer.

The Lands Tribunal case of Bairds Executors v IRC [1990] SVC 188 did confirm that a tenancy had a value, but gave no guidance as to how the value should be ascertained. The Revenue approach has broadly been to regard one-half of the difference between the tenanted and the vacant possession values of the freehold as being the value of the tenancy.

Option Agreements

Timing and business usage

In a lot of cases the landowner will sell his land to a professional developer, and this will be classed as a CGT disposal.

However, the possibility of progressive and deferred sales and the use of option agreements should be considered.

If a series of options are entered into with the sole aim of obtaining CGT annual exemptions, then the basic principles of Ramsay, extended by Furniss v Dawson, cannot be overlooked, the Inspector will be very aware of general anti-avoidance rules.

To avoid the restriction of rollover relief or the loss of BATR, ensure that land over which an option has been granted does not stand unused, or becomes incapable of use because it is inaccessible as a result of work that the developer has started on adjacent land. This can happen during the construction of motorways or other developments. Tax Bulletin No 2 (February 1992) set out the position that the Revenue & Customs accept that rollover relief on replacement of business assets is available in respect of a grant of an option over land by reference to the underlying land, though the land has to be occupied as well as used for the purposes of the claimant's trade to qualify.

Does the option qualify for (BATR)?

An option is not a part disposal of the underlying land over which the option is granted [TCGA 1992 s 144]. The grant of the option is the disposal of a separate asset. The option itself, because it is not a part disposal, does not matter how long the underlying land has been held by the person granting the option.

In a straightforward situation where the option is never exercised, the capital gain arises on the grant of the option and no BATR will be due.

Once the option is exercised, the disposal created by the grant of the option is cancelled [TCGA 1992 s 144(2) and (3)] and the sums received for both the grant and the exercise of the option are aggregated in one disposal at the time of the exercise. BATR then applies to the aggregated consideration, and is determined by reference to the date of the exercise, and by reference to the period of ownership of the asset disposed of [TCGA 1992 Sch A1 para 13].

If the asset changes status from being a business asset to a non-business asset between the date of the grant and exercise of the option, the apportionment rules will apply to the whole gain and part of the gain will lose business asset status. Similar restrictions apply where there is partial non-business use of the asset between the grant of the option and its exercise.

Where the change is unavoidable, a contract that crystallises accrued gains at the date the change of status in the asset occurs will ensure the whole gain to date qualifies for the higher business rate of taper relief.

The Barker Review

Currently, property developers only pay tax when they sell the land they have developed. The 'Barker Review of Housing Supply' proposes that a new tax – described as a planning-gain supplement – is charged much earlier, when planning permission is granted.

This may be bad news for property developers, as they will not have realised any cash at that stage. It is unclear quite how the Government expects them to be in a position to pay any tax.

Deferred consideration

The Finance Act 2003 introduced an additional entitlement to capital loss relief by adding a new tax relief under TCGA 1992 s 279A. The section recognises problems, which may arise where consideration for the disposal of an asset is represented by, or includes, a deferred unascertainable amount. This will frequently arise where an asset is sold and the whole or part of the consideration is deferred and can only be determined at some future date.

However, it remains necessary to value the 'right to receive future consideration' when establishing the chargeable gain or allowable loss on the occasion of the initial disposal. This is important when looking at the computation of tax.

The Set-Aside Scheme – land disposals and CGT

The EU Commission indicates that it wants to maintain set aside and it will continue with this policy.

The fact that land has been set-aside will not affect the basis of computation of any gains arising when some, or all, of the land is disposed of. In particular, rebasing, (TCGA 1992 s 35), will only apply to such a disposal if the taxpayer owned, or is deemed to have owned, that land as at 31 March 1982.

Where the set-aside land is left fallow, the Revenue takes the view that farming nevertheless continues on the land and that the set-aside receipts are income of the farming trade. Where the whole of the arable land of a farmer is set-aside this still applies.

Conclusion

Reliefs should also be considered when looking at compulsory purchase of land, reclamation of contaminated land and Freehold Reversion (purchase by a sitting tenant).

An advisor to a farmer should be aware of the reliefs available and also help the farmer to plan for the future. Income tax will also need to be considered when looking at profits from let land however this is a relatively straightforward area.

The main advisory service that can be provided is looking at the farm potential and considering ways to shelter gains that may arise, whether this be by the use of a trust, ensuring that the asset has been held for the correct amount of time in the correct entity or simply by advising on the different positions with regards to Rollover relief versus Business Asset Taper Relief. Examples of this are that land and buildings have to be sub-divided for Rollover purposes and this creates a tax planning tool in itself.

April 2005

Julie Butler FCA

Article supplied by Julie Butler FCA, Butler & Co, Bowland House, West Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email; j.butler@butler-co.co.uk.

Julie Butler FCA is the author of Tax Planning for Farm and Land Diversification (2nd edition) and Equine Tax Planning.