The restrictions on ER are fairly onerous with regard to the fact that it does not apply to let property, nor a mere asset disposal - it must be the whole or part of the business. Therefore it is likely that the owners of the land will turn to ‘rollover relief’ as an alternative to ER but this relief has equal problems in that it is restricted via the mixed use or partial use where there has been non-business use for a while, e.g. the let property, the private use etc, and this can be restrictive.
The tax planning angle is the review of the availability of CGT holdover relief which applies to agriculture.
With the onerous provisions of rollover relief and ER there is a temptation with potential development land to pass it down to the next generation using the holdover provisions for agricultural property and then wiping this land clean of those problems, i.e. periods when the land was let, periods when it was used for private use.
Then when the land is in the hands of the next generation one can ensure that there is the required qualifying period for ER, which is only one year of business use; then the ER limit of £5million and the attractive 10% rate of CGT can be available. When this is compared to the much more onerous 28% of CGT this direction is very attractive. It could, for example, apply where some land has become available for development that was part of a main farm.
There would be a loss in the uplift of value, as the base costs that would have to be used by the next generation disposing of the land would be the original base costs for the family. But then that would be no different than as if the transferors had disposed of it.
However, there would be various concerns as to whether the land would qualify for full inheritance tax relief and what HMRC would do with the ‘hope value’.
What of Inheritance Tax (IHT)?
The transfer of land would qualify as a transfer for agricultural property relief (APR) but consideration must also be given that a District Valuer would probably try and value this property at a high value for the hope value, i.e. when it is transferred as agricultural property from one generation to the next using holdover relief as this would be a lifetime gift for IHT purposes.
However it would have to be capable of achieving APR and business property relief (BPR), to cover for the possibility of the transferor not surviving the gift for 7 years. If it is let property there would be problems under the BPR provisions. However, this could be where a recent IHT case in the taxpayer’s favour (the “Nelson Dance” case) would come into play, depending on the full facts, and the provisions of such a transfer being tested by reference to the transferor’s estate.
The planning point is where there is development land which is tainted with criteria which would make it difficult to claim ER and rollover relief. There are distinct considerations in using holdover relief to pass to the next generation so that there is a clean product that can then be sold, being able to use ER and the advantage of the 10% and the £5million limit between family members.
By Julie Butler