Member Article

Farmland with development potential

Occasionally land owning farmers or retired farmers face the welcome prospect of making windfall gains from the sale of their land to builders.

If the land is within an urban area where the local authority has identified a need for extra housing, very often the sale proceeds can dwarf the income the farm has generated over many years of hard toil.

While this is all very exciting, it can lead to tax problems which may significantly reduce the value passing to the land owner and ultimately, the wealth passing to his heirs.

This is because the taxman gets two bites of the cherry: Firstly, Capital Gains Tax, (CGT) at 28% is payable on the profit realised on sale, but in addition, Inheritance Tax (IHT) at 40% will be payable when the wealth passes down to the next generation.

This means that a retired landowner selling for £3 million would pay £840k CGT leaving him £2.16m which then suffers £864k IHT on his death - in effect, his heirs would be left with £1.296m or roughly 44% of the original sale proceeds.

In practice the CGT charge may not be this high for many if there are costs to offset; and younger landowners may be able to pass wealth down the generations without incurring an IHT charge through surviving the gifts by seven years.

However, older people’s life expectancy may not permit them to avoid IHT. Many of them will have anticipated passing on the farming business to the next generation without an IHT bill, because in hand land and most tenanted land is free from IHT under the Agricultural Property Relief rules – but this relief disappears when the land is turned into cash. So what can you do?

With a development possibility identified, one way to reduce the IHT risk is to transfer the land to the next generation at an early stage. Even if the donor dies within seven years of the gift, the value upon which IHT is calculated is its agricultural value at the time of the gift - even though the land may be sold for many times that value before the donor dies. Nor can its value be substantially increased by the mere hope of being granted planning.

And if you have concerns over passing on such a gift to your children because of their matrimonial circumstances (now or later) or because they are not yet sensible enough to be given control over a large sum of money, the use of a trust or even a number of trusts, could be the solution.

Some people see trusts as costly and cumbersome, but they need not be so. Setting them up does need professional help (which does not come free of charge) but the ongoing costs need not be significant and a modern trust will give the trustees the freedom to deal with the assets pretty much as if they were their own.

By transferring your land into a trust before selling to the developer and making yourself and your spouse (or possibly another relative or close friend) a co-trustee, you can decide if, when and what the beneficiaries receive. But make sure you retain sufficient funds to ensure a happy retirement because you cannot spend the trust monies for your personal needs!

This was posted in Bdaily's Members' News section by Simon Richards .