Expert Tax Guidance for Shared Land Development Projects

If you are facing challenges related to legal, tax, insurance, management, or land matters, Farmers Weekly’s Business Clinic specialists are here to assist.

This week, Joe Spencer, a partner at MHA, provides insights on tax relief concerning farmland that has development potential and is held in shared ownership.

For more guidance, see: Business Clinic – tax advice for farmworker cottage construction

Q: We’re part of a farming partnership focusing on mixed arable and livestock farming, and we share ownership of a site with potential for commercial development. Our co-owner does not engage in farming.

We want to ensure we can all take advantage of Business Asset Disposal Relief when we sell the site. Can we leverage our trading status to benefit our non-farming partner?

We are also thinking about entering the land into the Sustainable Farming Incentive (SFI) until the sale happens.

What factors should we consider in our arrangement to strengthen our position upon selling the property?

A: This scenario involves several tax implications. To qualify for the reduced 10% capital gains tax (CGT) rate upon selling the site, your business must fulfill the criteria for Business Asset Disposal Relief (BADR).

The current 10% rate is available on gains of up to £1 million for individuals, contrasting with the previous limit of £10 million—potentially a point that Chancellor Rachel Reeves could adjust as part of future incentives alongside a rise in the main CGT rate.

The BADR applies to “disposals of business assets,” but securing this relief can often be complex. You may consider restructuring the operation of your jointly owned land to enable your non-farming partner to benefit from the relief.

A joint venture could be effective if all owners have other farming activities, but considering that one owner is not an active farmer, forming a new partnership may be advantageous.

This new partnership could manage the land, with your existing farming operation providing contracts or share-farming arrangements with it.

Upon selling the site, the partnership can be dissolved, allowing the owners to claim BADR. It’s advisable to have a sufficient lead time to ensure the partnership meets the two-year trading requirement.

Additionally, making the development land a partnership asset is crucial, which would involve creating legal documents and considering potential stamp duty land tax (SDLT) ramifications.

Further examination may be necessary if the land is included in a development pooling arrangement.

Your plan to enroll the entire land under the SFI should also be thoroughly evaluated.

While it’s comforting that land under qualifying environmental schemes can secure agricultural property relief for inheritance tax (IHT), this does not ensure the land’s value will qualify for business property relief (BPR).

If one of the owners were to pass away while the land’s value is speculative due to potential commercial development, and if BPR does not apply, only the agricultural value may receive relief.

To mitigate IHT exposure, it might be wiser to actively farm the land or hire contractors for cultivation, whether by growing hay or establishing a grazing license.

It’s essential to seek expert advice, as while reducing CGT on the sale is important, the greater risk is potentially facing a 40% IHT exposure.

VAT considerations are also essential. The formation of the new trading partnership will allow for VAT registration to reclaim VAT on trading-related expenses.

Moreover, as the land may be sold for commercial purposes, the owners should consider filing an “option to tax” with HMRC. This step will ensure that VAT is applicable to the land sale (which the buyer can typically reclaim) and enables the seller to recover input VAT on associated costs, such as legal and professional fees and marketing expenses.

It’s preferable to establish the option to tax early in the process to avoid last-minute complications. Applying VAT to the sale could increase the purchaser’s SDLT obligation, so this agreement should be reached promptly to prevent unexpected issues.

With various parties involved and the transaction deviating from standard trading activities, we highly recommend obtaining professional guidance to navigate potential challenges and align the objectives and expectations of all parties.

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