Sheltering development profits

There 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 shelter 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. The Inland Revenue are not saying that the farmer is trading in land, but developing with ‘the s

For more information on Sheltering development profits talk to Butler & Co (Bishops Waltham) Ltd