There are farmers who, whilst not wishing to retire from farming, are considering selling part of their farm or peripheral enterprises. For example, there are many who have diversified into holiday cottages, or set aside some of their land for separate entities, such as a caravan site, a farm shop, and the like, and who are thinking of divesting themselves of these ‘extra’ businesses.
This might also apply to these who are restructuring their businesses using Limited Companies and Trusts.
The changes in Capital Gains Tax over the last few years have been quite penal in this respect, and the availability of the 10% tax rate under Entrepreneurs Relief has been squeezed. However a recent tax case has shed some light on this area, and given possible pointers towards how things may be arranged so that this lower CGT rate can be more generally achieved.
Gilbert V HM Revenue and Customs is the case in question.
Mr Gilbert’s business comprised a number of individual but similar contracts with customers. Gilbert was paid by one customer to discontinue his work, and pass all his database and records in relation to that customer, which was effectively over a disposal. HMRC maintained that this was a simple disposal of assets, and the cash Gilbert received did not rank for Entrepreneurs Relief and the lower 10% tax rate.
However it was held by the Tribunal that it did, as what had been disposed of was indeed part of the business itself, not just assets, because that part sold could operate separately as a Going Concern. Someone else could have taken that contract and run it as a viable business. The lower 10% tax rate therefore was held to apply.
So, on the farm, the question to be addressed is whether part of the business has been disposed of rather than merely some assets. As examples, a few fields would not be enough, although there might now in the light of Gilbert be an argument that a farmer farming two separate farms, with separate farm houses and buildings, might succeed. The disposal of properties used as furnished holiday lettings would be likely to be seen as the sale of a separable business.
It is all about whether what is being sold could be run as a business in its own right, and evidence to support that claim.
There is some confusion as to whether the entity being sold needs to be continued as a business by the purchaser. Whilst this clearly provides evidence that it is a separable Going Concern being transferred, it is not crucial. For example, holiday cottages may be sold and the purchaser may convert them for his own living accommodation – this would not rule out Entrepreneurs Relief for the vendor. The key is the position of the vendor, not the position of the purchaser.
There are a number of practical steps that farmers should take to ensure the best chance of attracting Entrepreneurs Relief:
- Separate accounts should be maintained for the entity being sold. This is evidence that it is regarded as a separable business. This is easy for such as a holiday cottage or a farm shop, but not so easy for say a chicken-rearing shed on an arable farm. If distinct accounts are not kept, it is imperative that the farmer’s business records reflect the day to day running of the separate trade.
- With regard to the separate accounting, clearly the longer this has been going on, the stronger the evidence and the argument that it is a separate Going Concern being sold.
- The transfer must be formally addressed from a legal perspective, with a Sale and Purchase Agreement drawn up and structured as a business disposal rather than an asset sale.
- There must be a valuation of stock, even if just tillages, and of related fixed assets, and this must be contained in the sale price.
In summary, Gilbert V HMRC provides signposts as to what farmers should do to raise their chances of achieving Entrepreneurs Relief, and paying Capital Gains Tax at 10% rather than at much higher rates. These things cannot be done in retrospect. Considering the values of land and buildings, the amount of money involved could be very substantial, so the extra effort required in the presentation and the foresight is well worth it. There is no point in paying any more tax than you have to.