29 August 2018

Entrepreneurs’ Relief: The lay of the land

With pressure of local authorities to meet their quota on housebuilding, many agricultural land owners are now seeing the potential of selling off land to developers or renting land to generate an income. 

These deals can be lucrative, with housebuilders willing to pay premium prices per acre for well-located land. However, land sales will lead to a Capital Gains Tax (CGT) charge that could significantly diminish the net proceeds. Unless, that is, you could be eligible for Entrepreneurs' Relief. This seems unlikely, however with forward planning, the land could qualify as a business asset even if it has been let for many years under an agricultural tenancy. At the same time, partial sales of farm land might not qualify for Entrepreneurs’ Relief even when the owner has actively farmed the land.

What is Entrepreneurs' Relief?

Entrepreneurs' Relief came into effect in 2008 and applies to certain individuals who qualify for the tax gains it brings. It was introduced to reduce the rate of capital gains tax (CGT) payable on qualifying gains to 10% up to a lifetime limit, which is currently £10m. 

The normal rate of CGT is generally payable on gains over the annual exemption (£11,700 for 2018/19) at 20% but 28%,for second properties although those who pay income tax at the basic rate are charged a lower 10% or 18% rate. This means that with the correct advice, you could make a tax saving of at least £1million. 

If you are a husband a wife team, you can have your own lifetime individual limit, leading to considerable tax gains.

Do you qualify for Entrepreneurs’ Relief?

RWB can help you discern whether land let on an agricultural tenancy will ever qualify as a business asset to claim Entrepreneurs’ Relief. 

The brief answer to this is, yes, if:

  • The land is used in your business and is not a partial sale. It must be owned by yourself as a sole trader or in partnership with others for at least one year prior to any sale; 

OR

  • The land must have been owned by yourself, as a sole trader or in partnership with others, for at least one year and the sale must take place within three years of the date the business ended.

Entrepreneurs’ Relief Question Time

There are also a number of other questions to ask, to establish whether Entrepreneurs’ Relief applies, including: 

  • Are the tenancies for the last 12 months for 364 days or less?
  • Has the land been used for grass growing – hay making, livestock grazing or crop growing?
  • Who is responsible for maintaining fences and gates?
  • If the land needs fertilising or weed-killing who does that?
  • For tax purposes, who is the deemed occupier for capital gains tax - the farmer or the owner?
  • Where land is owned jointly by two or more people, are all owners actively involved?
  • If the land makes a profit, how should the income be declared - as rents of business profit?

The law around Entrepreneurs' Relief is very complex, but quite often favourable outcomes can be achieved with an in-depth understanding and pre-planning.

At RWB Chartered Accountants we have experience of both successfully qualifying and non-qualifying cases.  Contact our expert tax team on 0115 964 8888 or email enquiries@rwbca.co.uk today. 

The views provided in this article are for general information purposes only. Nothing in this article represents advice of any nature whatsoever. Accordingly, RWB CA Limited does not accept any liability or responsibility for the information contained in this article or any decision or other action that may be taken in reliance upon the information contained within it. RWB CA Limited accepts no responsibility for any errors of fact or opinion and assumes no obligation to provide you with any changes to its assumptions.