CGT implications must be considered for farming businesses

Farming businesses are being advised to think about the capital gains tax (CGT) consequences where they are reviewing the scale and scope of their enterprise for the future.

Martyn Dobinson, partner at Saffery, and a member of the firm’s Landed Estates and Rural Business Group, comments:

“Inevitably, the changes to the agricultural subsidy system have prompted many farming business owners to undertake an in-depth review of their operations. Given the current uncertainty, some are concluding that streamlining is necessary, and they are looking to take advantage of current land prices by disposing outlying areas of land. It’s important to recognise the CGT implications, especially given that in many cases, the land under consideration has been in the family for many decades and will have a low base cost for tax purposes.

“Whilst the sale of the whole farming business might not be a realistic prospect for some families, particularly where the family has farmed for several generations, there may be the opportunity to sell small outlying or unproductive parcels of land, or to explore sites with development potential, especially those bordering existing residential or commercial development.”

Where ‘small’ land sales are made, and the qualifying conditions are met, the taxpayer can claim for relief under the part-disposal rules. Rather than suffer the CGT on the disposal, they can make a claim instead, for the sale proceeds to be deducted from the CGT base cost of the land that they are retaining.

The qualifying conditions are:

• The consideration must not exceed 20% of the market value of the entire holding, including the retained land, at the time of the disposal.
• The consideration received for the land must not exceed £20,000.
• The total consideration, or value, of all land disposals in the tax year must not exceed £20,000.

Where the part-disposal treatment is claimed, the gains arising on the ‘small’ disposal effectively don’t become taxable until such point that the larger retained holding, or a further part thereof, is disposed of.

Where the entire farming business, or a clearly separable part thereof, is sold, or indeed, qualifying business assets (such as land) are sold as part of a cessation of the farming business, then Business Asset Disposal Relief (BADR), previously called Entrepreneurs’ Relief, could be available.

This relief allows up to £1 million of qualifying capital gains to be taxed at a reduced 10% rate of CGT. The £1 million is a lifetime limit and can be applied to different qualifying transactions.

Martyn Dobinson added:

“To successfully claim BADR, the claimant must be disposing of an entire business, or a part of the business that is capable of operation as a business in its own right. For example, a farmer might dispose of an arable operation, but retain their livestock operation, so long as the two could be operated as separate businesses. Alternatively, where claiming in respect of a disposal of qualifying business assets, the farmer must dispose of the assets as part of their withdrawal from the business in question. Again, that could be a withdrawal from arable farming to concentrate on livestock farming, where the two are separable.”