Selling land for development – a case study
Our Tax, Legal and Financial Planning teams often work together to provide complete and comprehensive advice to clients. One area they are often asked to help with is detailed in the following Q & A:
Q: “I have been approached by a land promoter about the possibility of selling some of my farmland for housing. I currently use the land in my arable farming business. Is there anything I should be thinking about now to ensure I am maximising the benefits of any value received whether immediately or in the future?”
A: The tax planning opportunities will depend on whether or not you are looking to benefit from the proceeds yourself or if you are looking to make some gifts of value in conjunction with this.
To ensure you minimise any tax on the sale of the land it will be important to make the most of the Capital Gains Tax (“CGT”) reliefs available. Rollover Relief may be available if you are looking to reinvest some or all of the sales proceeds in qualifying assets, such as new farm land. Business Asset Disposal Relief formerly Entrepreneurs’ Relief (“BADR”) may be available on the sale of the land representing a 10% tax rate on up to the first £1 million of gains per owner, however certain conditions will need to be met. Reviewing the structure of the business to ensure that you make the most of either of these reliefs will therefore be important.
If you would like some of your family to benefit from the sales proceeds then now would be a good time to consider making a gift of some of the land either to them personally or into Trust for their benefit. By making a gift of the land now you are able to bank the value (and any reliefs available) at its current worth minimising any potential tax cost on the transfer, and maximising the Inheritance Tax (“IHT”) savings due to the uplift in value, as a result of planning permission being granted, being completely outside of your estate. If you delay any gift and the land gets nearer to planning permission being granted then the value of the land being given away will be significantly higher which means you are potentially increasing your CGT costs and reducing your IHT savings.
Transferring the land now may mean the loss of BADR however steps may be possible to allow the new landowners to benefit from this themselves. Even if this is not the case then the loss of BADR may be an acceptable cost compared to the level of potential IHT savings achievable.
A: Planning permission being granted is likely to cause the value of the land to increase, so you may wish to take advantage of the lower value prior to this. For example, you may wish to gift the land now to a Discretionary Trust for the benefit of your family.
Some lifetime gifts into trust can be immediately chargeable to Inheritance Tax, if they are above a certain value, so by gifting the land at pre-planning permission value you might avoid or reduce an immediate charge to Inheritance Tax. If the land is used for arable farming purposes, then relief from Inheritance Tax under Agricultural Property Relief (APR) might be available on the gift of the land into trust. However, APR can be clawed back in certain circumstances, so ensuring the value of the land is at its pre-planning rates when making the gift, is important. There will be interactions with other taxes, such as Capital Gains Tax and Entrepreneurs Relief that need to be considered to find the best strategy as described by Jo White, so taking advice early is essential.
The benefit of using a Discretionary Trust, rather than outright gifts to individuals is that it is a very flexible arrangement. When you create the Discretionary Trust, you can decide who the trustees and beneficiaries are. You can also be a trustee thereby allowing you to retain control over the management of the trust. The trustees have the power to negotiate with the developers and manage the arrangements around the sale and once it has gone through, they can decide whether to retain or distribute the sale proceeds to the beneficiaries. Before making any decisions, the trustees can review the personal circumstances of each beneficiary and any tax consequences.
This would also be a good time to review your Will. It is advisable to revisit the provisions of your Will regularly, but particularly whenever your financial or personal circumstances are about to change, and in this case it would be important to ensure any lifetime arrangements, such as Discretionary Trust, dovetail with the provisions on death.
A: Firstly, consider your objectives. How can the money be used to best meet your future needs?
Whether the funds need to be retained for your long term financial security, such as retirement planning, or needed to meet shorter term aims, such as helping your children through University or to buy their first home, you will need a financial plan built just for you.
As your adviser I would use Lifetime Cash Flow Planning to build such a plan. This exercise looks to project the levels of capital and income needed to provide for your future financial security, and once sufficient funds are earmarked for your essential needs, you can then start to consider the levels of expenditure you may want to make for the fun things in life.
Once your plan is established it is then all about how to make the money work both smarter and harder for you.
Consider additional pension contributions to take advantage of the valuable tax relief available to reduce your immediate tax bill, as well as the long-term tax efficient growth potential and Inheritance Tax benefits associated with Pensions.
You may have the option to Carry Forward unused allowances from future years to maximize these benefits via a large single ad hoc contribution. However, make sure you do not exceed your Annual and Lifetime Allowances or you may face punitive tax penalties.
ISAs will enable you to avoid unnecessary tax going forward, whilst other tax efficient options, such as investment bonds, may allow you to defer future tax liabilities to manage your tax position efficiently.
Whatever the tax wrappers you use, selecting the appropriate underlying investments is key to avoid taking unnecessary risks whilst offering sufficient potential to meet your lifetime goals. A full understanding of your attitude to risk, capacity for loss and future financial plan will enable me to match the right investments for your personal plan.
The content of this article is for information only and does not constitute formal financial advice.
This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make, or refrain from making, any decisions. Always obtain independent, professional advice for your own particular situation.
For more information and advice, please contact us via email or call +44 (0)330 124 1399.
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