Farmers have been able to claim entrepreneurs’ relief (ER) on qualifying gains made since 5 April 2008, paying just 10% tax. This article reflects on the conditions with references made to case decisions.
These conditions are found in sections 169H to 169SA of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) and points to watch include:
There must be a material disposal of a business asset but don’t be misled into believing that ER is available on all sales of a business asset. HMRC’s definition of a disposal of business asset is found in section 169I(2) TCGA 1992 and is:
The First Tier Tax Tribunal (FTT) considered this in the farming case of Russell (2012) TC 02299. 6.72 hectares of a 21.65 hectare farm were sold but the partnership continued to farm the retained land in the same manner after the sale. The FTT held that this was a disposal of a business asset and not the disposal of part of a business denying the claim for ER.
Here ER is available if the asset is sold within a set time after the business cessation but not if sold prior to the business cessation. One difficulty for farmers is the delay between exchange of contracts (the date of the disposal for capital gains tax) and completion. Given the amount of tax at stake, the writer has tended to err on the side of caution. The cessation of trade, whether by sale to a third party or by transfer to a company, has been timed to coincide with the exchange of contracts. This has involved arranging to sell growing crops along with the land and, in one case, advising a client who sought advice too late that their maize crop would need to be left untended and unharvested. Caution that may prove to be valuable in this case as the Revenue have opened an enquiry requesting copies of numerous documents including farming related invoices together with the farm plan.
To qualify under this heading, throughout the 12 months prior to the date of sale:
Condition A2 The disposal is of at least a 5% interest in the ordinary shares of a trading company which carry at least 5% of the voting rights and no share purchase arrangements exist. (Share purchase arrangements mean arrangements under which the owner or a person connected with the owner is entitled to acquire shares in the trading company or group). Or,
Condition A3 The disposal is of at least a 5% interest in the securities of a company and no share purchase arrangements exist. And
the disposal must be part of the taxpayer’s withdrawal from participation in the trade of the partnership or company.
The personally owned land must have been used for business purposes throughout the period of 1 year ending with both the disposal of the personally owned land and the relevant material disposal of a business asset.
The personally owned land must have been owned for a period of at least three years.
In conclusion, there are a multitude of conditions to meet and timings to watch if you are to be successful in claiming ER for your client. Early planning is essential.
Elizabeth Peters, Tax Partner, Ballard Dale Syree Watson LLP
Farming and Rural Business Group, September 2017