Capital Gains Tax planning for farmers

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Capital Gains Tax is the tax payable on the increase in the value of a business asset, for example business property, shares and goodwill, writes Seamus McCaffrey, Accountant, Omagh.

Capital Gains Tax is concerned with beneficial ownership not legal title, and, gains up to 5 April 1982 are exempt. The gain is calculated by looking at the difference between the sales proceeds, or current market value if a gift, and the original cost or if the asset was acquired before April 1982, the valuation of April 1982.

Enhancement expenditure since the date of acquisition and disposal costs are allowable, as is an allowance for inflation up to 1998. There are three rates of Capital Gains Tax dependent on the particular circumstances giving rise to the gain: 10; 18 and 28 per cent. Each individual making a taxable gain has an exemption of £11,000 of a gain but if the vendor is a trust the exemption is only £5,500. A limited company has no exemption. There is no Capital Gains Tax payable on transfers arising at death.

There are many and varied reliefs against Capital Gains Tax. Firstly, the gain on the sale or gifting of your principal private residence is exempt. If you move out of a dwelling house before it is sold or gifted, you are allowed a further period of eighteen months where contracts are exchanged on or after 6 April 2014.

If during the period of ownership of the house, it was let out, then there is lettings relief which can be claimed, subject to a Revenue formula. Secondly, there are a number of reliefs against Capital Gains Tax on the sale or gifting of business property.

Where a property from which a trade is carried on is sold and the proceeds are reinvested in the purchase of new business property, improvement to existing property or the construction of buildings used for business property, then the gain on the sale of the first property is ‘rolled-over’ and the payment of Capital Gains Tax is deferred until the second property or subsequent properties are sold. The new business property must be acquired one year before the sale or three years after the sale of the first property.

The gain on the transfer to the next generation of a business property from which a trade is carried on is eligible for ‘hold-over’ relief.

This means that no Capital Gains Tax is payable at the time of gifting the business property provided that both the transferor and transferee jointly sign a written election stating that the amount of the gain arising on the transfer is ‘held-over’ until the business property is eventually sold.

Where the business owner sells all or a major part of the business but does not reinvest the proceeds in new business property then Entrepreneurs’ Relief may apply, resulting in Capital Gains Tax being paid on the gain at 10 per cent. In order for Entrepreneurs’ Relief to apply, there must be a very significant reduction in business activity or a complete cessation.

A recent tax tribunal decision ruled that a significant change in a business was a cessation of one trade and the start of a second business, and therefore, the taxpayer was able to claim Entrepreneurs’ Relief against the gain on the disposal of the first business.

The decision will be of interest to business owners who are contemplating a shift of emphasis in the business, and the disposal of assets used within that business. Entrepreneurs’ Relief is also available to the gain on the sale of shares in trading companies and to shares in companies which are approved by Revenue and Customs under the Enterprise Investment Scheme (EIS).

Up to 3 December 2014 individuals and partnerships incorporating a trade into a limited company could avail of two tax reliefs. The first was to pay 10 per cent on the goodwill which they sold to the company. The purchase price became a debt owned by the company, allowing a tax free drawing as the company made profits and could repay the debt. Second, if the business was incorporated after 1 April 2002 corporation tax relief was available to the company as it amortised that goodwill. With immediate effect from 3 December 2014, Entrepreneurs’ Relief ceased to be available on such a sale of the goodwill and tax relief can no longer be obtained on depreciating it once in the company.

The new rules apply for assets acquired by the company from 3 December 2014 unless acquired under an unconditional contract before then, with an accounting period straddling 3 December split into two for the purpose of apply the rules.

Capital Gains Tax planning is a key ingredient in implementing an effective succession strategy. Seeking timely advice ensures that the business can avail of the many tax reliefs which are available.