Our farming team are currently dealing with a number of tax issues arising from development opportunities following the relaxation in the planning rules for residential building sites.
If you own land that has any hope value for future development it is important to speak to your Accountant as soon as possible. Lack of any tax planning can and often does prove costly. Jonathan Crowther has summarised the position below.
When discussing a possible deal with a developer, there are range of contract types such as option agreements, joint venture agreements, promotion agreements and some clients are also involved with uplift or overage agreements. The tax treatment of all of these is quite different and complex tax rules often apply. However, wherever possible the Accountants role should usually be to try to secure capital treatment of future receipts for our landowner clients so that the profits are subject to Capital Gains Tax rather than Income Tax.
Another common issue we face once capital treatment is established is to try to secure the Entrepreneurs Relief (ER) tax rate of 10% rather than the 28% rate that applies to normal capital gains.
Firstly, there are different rules depending on whether the landowner is a sole trader farmer, partner or whether the farm trades as a limited company. Secondly, to qualify for ER the farmer must effectively ‘retire’ from the business and selling a few acres of farmland will not attract this relief. Another essential requirement is the land must actually be farmed in the sole trader business or in the farming partnership or company. Leasing the land to a neighbouring farmer or even if it is subject to a Farm Business Tenancy (FBT) means that ER will be denied.
So, FBT’s that were much heralded as the saviour for farmers wishing to take a back seat and retain their Inheritance Tax relief on their land are a major problem if the land is sold. Anyone owning land subject to an FBT that has any sort of hope value should take early advice on whether this land should be brought back into the farming activity. The situation is probably worse for FBT land held within partnerships or companies as any ER claim will need to be scaled down to reflect the period it was subject to the FBT since April 2008.
This article simply scratches the surfaces of the complex tax issues to consider when an approach is made by a Developer. However, the problems highlighted with FBT’s mean that all farmers should take advice from their Accountants and Land Agents to re-assess whether these FBT’s are still appropriate to their individual circumstances.
Jonathan Crowther FCA