Capital gains tax planning for farms

Capital Gains Tax (CGT) is often forgotten when dealing with the affairs of a deceased though its impact can be considerable when, for example, assets are sold for more than probate value. By considering all circumstances of the estate and beneficiaries in the round, significant savings can be made on the estate’s tax bill, writes Seamus McCaffrey, accountant, Omagh, pictured.

The probate value is the value of an asset agreed with HMRC at the date of death. This becomes the acquisition value or base cost for the estate, possibly resulting in a tax-free uplift for CGT purposes.

A capital gain would then arise where the asset increases in value during the administration of the estate. Farms can increase in value during the probate period and likewise the probate valuation can prove to be cautious as the sale of the farm approaches. Estates pay CGT at 20 per cent or, in certain circumstances, at the upper rate of 28 per cent for sales of residential property which do not benefit from Principal Private Residence Relief.

As such, CGT is required to be considered by executors and administrators.

An annual exempt amount for CGT will still apply, just as with individuals, but only for the tax year in which the death occurred and the two following years. The tax free allowance is the same as that which applies to individuals, £12,000 for 2019/20.

An asset standing at a gain can be transferred to a beneficiary who may then go on to sell it utilising their annual exemption. The beneficiary is deemed to receive the asset as legatee at probate value and can be an effective method of saving tax if the correct planning is put in place. The personal situation of the beneficiary must be considered; their rate of tax; availability of losses and their personal allowance.

It is also worth considering whether it is practical for the asset to be shared between a number of beneficiaries.

With more farms coming on the market to raise money in order to pay out non-farming members of the family, the variance between probate and market value can vary considerably and may result in CGT liability.

Relief for a loss on the sale of land and buildings is available where assets are sold within four years of the date of death. This allows the land to be ‘revalued’ for inheritance tax purposes (IHT) if sold for less than the probate value. However, a lower value for IHT will result in a lower base cost for CGT and, accordingly, a view must be taken as to which works best.

By considering all the circumstances of the farm estate and beneficiaries in the round, in consultation with the solicitor and accountant, significant saving in tax can be made.

For further information, telephone (028) 82241515