Gifting development land – how should I do it?

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Each month we answer some of the most pressing questions sent in by farmers as part of the Farmer’s Weekly Business Clinic. Last month a reader asked ‘some land owned by our farming partnership has development potential.  Is it better to bring the next generation into the partnership or to gift it to the next generation outside of the business?’ Head of Agriculture, Andrew Robinson provided the following response:

“As always, it is advisable to undertake planning on development land at an early stage. There are more options available when land is still in agricultural use, and its value will be lower before planning permission is applied for.

Business succession and the involvement of the next generation within a farming business is the most important decision a farming family has to make. We would caution against taking decisions which benefit the short-term tax position but don’t fit the long-term aims of the next generation.

The issues can be split into Capital Gains Tax (CGT), Inheritance Tax (IHT), and non-tax issues:

Capital Gains Tax

• The sale of land which was purchased or inherited at agricultural value will obviously lead to a large capital gain.
• The rate of CGT payable will be either 10% or 20%, after deduction of an annual exemption of £12,300 per individual.
• If the family intend to invest the proceeds in replacement land or other qualifying assets, Rollover Relief can be claimed to defer the CGT until the new asset is sold.
• A claim for Business Asset Disposal Relief (BADR) will result in up to £1 million of capital gains per person being taxed at 10%. Until April 2020 the lifetime limit was £10 million per person.
• Only certain disposals of business assets qualify for BADR, most commonly the sale of all or a distinct part of a business. The sale of a small area of land for development will not qualify unless a business restructure takes place at the same time as the land is sold.
• A person needs to be a partner in the farming business for at least two years to qualify for BADR. Therefore planning to obtain BADR needs to take place well in advance of the likely sale date.

Inheritance Tax

• The sale of development land and investing the proceeds in non-business assets can result in an IHT liability. IHT is paid at 40% on a person’s estate after the deduction of agricultural and business reliefs, and nil rate bands.
• Agricultural Property Relief is only available on the agricultural value of land, and development land clearly has non-agricultural value. Business Property Relief can be available against the non-agricultural value of land, but only if it is owned within a partnership.
• IHT can also be paid on assets given away in the seven years before death. One benefit of gifting assets during lifetime is that IHT is calculated on the value at the date of gift, rather than its value at the date of death.

Non-tax issues

• The receipt of proceeds from development land should make succession planning easier, in that funds are available to fund the inheritance of non-farming children.
• Where a partnership owns land, and new partners are to be introduced, it is absolutely essential to have a well-drafted partnership agreement.
• Passing assets to the next generation as part of tax-planning, could of course have an adverse consequence in the event of divorce or dispute within the family. Creating a trust for the benefit of grandchildren for example is an effective way of passing assets down the generations while safeguarding against these issues.

Planning for development land is not easy because the timing of any receipts is uncertain, and usually outside the control of the landowner. Sometimes projects take many years to come to fruition and it is not clear whether priority should be given to CGT or IHT planning.”

To read Andrew’s response to other issues please visit the Farmer’s Weekly website