Selling farm assets
The decline in farming incomes over recent years has resulted in some farming businesses facing cash flow problems, leading to increased bank borrowings. Unfortunately, some farm businesses have been faced with the situation that to survive they must realise some of their capital to reduce debts.
Tax Implications.
A capital gain arises when certain capital assets are sold at a profit. The gain is the sale proceeds (net of selling costs) less the purchase price or asset value as at March 1982. From this, a number of deductions are made to reduce the gain to an amount which is taxable. The pre-1998 system involved the deduction of an indexation allowance which effectively removes the inflationary element of any gain. New rules replaced this with a taper relief, which is based on the length of ownership and reduces the gross gain by a taper percentage. The amount of reduction depends on:
- How long you held the asset, and
- Whether the asset was a business asset or a non-business asset.
If an asset is disposed of on or after 6th April 1998, the amount of the chargeable gain on the asset after any relief (such as rollover) and allowable losses is shown in table1.
Table 1. Capital gains tax and chargeable gains.
| Business asset Number of whole years in the qualifying holding period |
Business asset Gain remaining chargeable % |
Non - business asset Number of whole years in the qualifying holding period |
Non - business asset Gain remaining chargeable % |
|---|---|---|---|
| Less than 1 | 100 | Less than 1 | 100 |
| 1 | 50 | 1 | 100 |
| 2 or more | 25 | 2 | 100 |
| 3 | 95 | ||
| 4 | 90 | ||
| 5 | 85 | ||
| 6 | 80 | ||
| 7 | 75 | ||
| 8 | 70 | ||
| 9 | 65 | ||
| 10 of more | 60 |
Each individual has an annual exempt amount which also has to be deducted. It is important to remember that while relief and allowable losses are deducted before taper applies, the annual exempt amount is only deducted after taper has been calculated. The current annual exempt amount is £7,700 and normally increases each year broadly in line with inflation.
To illustrate these points, consider a farmer selling a building site in March 2003 for £50,000. The 10 acre field in which the 1 acre site is situated was purchased in 1981 at a cost of £20,000, thus the March 1982 value of the site is £2,000 as used in example 1. Alternative methods for calculating the value of an asset in March 2002 can be used.
Example 1
£ | £ |
|
| Market value (m.v) March 2003 | 50,000 | |
| Less Cost (m.v at March 1982) | -2,000 | |
| Less Indexation to April 1998 | -2,094 | |
| Capital gain before taper | 45,906 | |
| Business asset (assume held >2years) thus 75% taper | 34,429 | |
| Tapered chargeable gains | 11,477 | |
| Less annual exempt amount | -7,700 | |
| Amount Chargeable to CGT | 3,777 |
How much CGT do you have to pay?
The amount of CGT is based on the amount chargeable to CGT. In the example above this would be £3,777. The rate of CGT payable depends on the level of your income liable to income tax.
- 10 percent if your total income after allowances is less than the top of the starting rate band £1920.
- 20 percent if your total income after allowances is less than the top of the basic rate band of £29,900.
- 40 percent if your income is above the basic rate band.
The classification of business and non-business assets is becoming more complicated. In some cases it would be easy for a business asset to fall in to the non-business asset criteria and therefore be tapered at the less favourable 'non-business asset' rates.
For example, a farm building may be let to supplement farm income or excess milk quota leased for a number of years. This may convert the asset from being a business asset to a non-business asset with potentially serious Capital Gains Tax consequences
Rollover Relief.
In some cases, farmers may defer all or part of any Capital Gains Tax charge by reinvesting in farmland or other qualifying assets and claiming rollover relief. In effect this relief allows you to postpone paying tax until you dispose of the new asset.
If the whole amount received from the disposal of the old asset is used in the acquisition of a new asset, the entire gain will be deferred. Consider the building site sold for £50,000, from example 1 where the individual is required to pay CGT on £3,777. If we assume a portion of the sale proceeds is reinvested, say £20,000, the individual can claim rollover relief on this amount, thus reducing the amount chargeable to CGT. In this particular case a reinvestment of £20,000 would defer the entire bill. It is important to remember CGT is concerned with the disposal of assets and not liabilities. A debt is classified as a liability, therefore it will not attract rollover relief. A borrower will not make a chargeable gain or allowable loss by paying off debt.
CGT Planning and The Farm Business.
When forward planning for any tax purpose it cannot be over emphasised the importance of reviewing the proposals with your accountant. Discussions at an early stage can iron out any potential problems. When considering sales of property it is vital that the Capital Gains Tax position is reviewed in advance. Many sales of agricultural land and buildings, owned prior to 1982, are unlikely to result in a tax charge. When calculating the amount chargeable to CGT the structure of the farm business is of less importance, than the classification of asset ownership. Assets held in joint ownership by two individual sole traders will attract twice the annual exempt amount of an asset held by one individual. Other non-tax implications of selling assets, particularly building sites must also be considered prior to sale:
- New neighbours not accustomed to country living.
- Changes to field shape which may impede future field operations.
- A reduction in the asset base of the farm business.
Farmers fortunate enough to own property with development potential must take particular care to ensure that the capital gains tax bill is minimized on disposal. If in any doubt about your CGT tax position professional advise should be sought before it is too late.
Prepared by:
Stephen Cunningham (R) from Stephen Cunningham & Co. Chartered Accountants.
Conail Keown Business Technologist Greenmount Campus, CAFRE
