Most landowners undertaking agricultural or other trading activities on their land may assume that they will qualify for a tax relief known as entrepreneurs’ relief (ER) when they come to sell it. This will mean that higher rate taxpayers will pay Capital Gains Tax (CGT) at a rate of 10% rather than 20%.
So, what is the issue?
To qualify for ER, you must dispose of the whole, or a distinct and separate part of your business. The sale of a tranche of land will not qualify for ER as HM Revenue & Customs (HMRC) view it as a single asset.
What can be done to protect ER?
If you are not selling your entire business or a distinct and separate part of it, you will need to re-structure things to qualify for ER. If you have to re-structure your business, you should allow plenty of time for this to be completed as ER is only available once you have carried on the business for at least 12 months preceding the sale. Some of the options available to you include:
- Ceasing to trade – if you cease trading you have up to 3 years to dispose of the business assets, the sale of which would qualify for ER. If you are only selling a small holding of land, there is nothing to stop you from setting up a new business venture. After you have traded for a further 12 months your new business will qualify for ER providing HMRC are satisfied that the business has been carried on commercially.
- Incorporate your business – if you trade on your own or in partnership you could transfer your business (except the land you wish to sell) to a company. Provided you sell the retained land within 3 years of the incorporation you should qualify for ER on the sale. Please note that other tax considerations need to be considered when incorporating a business.
Be careful out there
It is very important that any tax planning is undertaken in good time and there are sound commercial reasons for doing it. If HMRC suspect a new business structure has been created simply to achieve a tax saving it may challenge any claim for ER. This may result in a higher tax bill for you.
For this reason, it is always recommended that you take professional advice before embarking on any potential tax planning initiative.
If you do not qualify for ER on a disposal all is not lost. There are other generous tax reliefs out there that may help you alleviate a charge not only to CGT but possibly other taxes as well.
If you are re-investing some of the proceeds in your business by acquiring new assets, you may qualify for roll-over relief. With this relief, all or part of the gain arising on the sale of the land (depending on the amount re-invested in the business) is rolled over into the cost of the new asset.
There is also the Enterprise Investment Scheme (EIS) the concept of which is broadly similar to the Dragon’s Den TV programme. You basically subscribe for shares in an untested trading company and in return the Government offer you Income Tax, CGT and Inheritance Tax reliefs. Maximising these reliefs to the full will mean that you are risking very little of your own cash.