Landowners beware land-sale tax implications
Following the introduction of the National Planning Policy Framework and the fact that many local authorities are finding it difficult to prove they have a five-year housing supply, many landowners and farmers who retain land on the fringe of settlement boundaries are finding that developers are approaching them looking to tie up option and promotion agreements.
However landowners and farmers who are approached should first consider the longer term tax implications of such higher value land sales which run the risk of generating high and unpalatable levels of capital taxation liabilities.
Prior to April 5, 2008, farming businesses could sell off parcels of land for development and only pay 10 per cent Capital Gains Tax.
Farming businesses are now restricted to entrepreneur's relief only.
Entrepreneur's relief is available for the disposal of relevant business assets. In the case of a farming business this could be agricultural land. The effect of the relief is to reduce the rate of CGT from 18 per cent or 28 per cent to 10 per cent.
Great care ought to be taken by farmers as they near retirement and consider letting out their farm and land.
The time may come whereby it seems appropriate to let somebody else run the farm by letting it out on a Farm Business Tenancy so the landowner simply collects the rent.
Land let on an FBT does not however qualify for entrepreneur's relief. There are other options open to farmers wishing to take a step back.
A genuine share farming agreement allows the retiring farmer/landowner to still benefit from the Inheritance Tax, Capital Gains Tax and income tax advantages of being treated as a farmer running a farming business.
The detail of a share farming contract is a matter for the parties but often they include the following features:
The landowner provides the farm land and buildings, fixed equipment and machinery, major maintenance of the buildings and his expertise.
The share farmer provides labour, field and mobile machinery and his expertise.
Other costs such as seed, fertilisers and feed are shared. If there is a livestock enterprise then ownership of the animals is shared on the basis that each party owns a share in each animal.
Each party is rewarded by a share in the produce of the farm which he or she is free to sell as he or she likes.
Each party produces his own accounts and is responsible for his own tax and VAT returns.
The landowner should be seen to be taking a financial risk as any other business person does in order to demonstrate that a genuine share farming arrangement is in place with the profit or loss of both parties being dictated by the cost of production and commodity markets current at the time.
Landowners with land with development potential ought therefore to seek professional advice when considering either retiring or restructuring their business.
* Matthew Burton, Fisher German chartered surveyors
