Capital Gains Tax Planning

Seamus McCaffrey, Accountant
Seamus McCaffrey, Accountant

Capital Gains Tax is the tax payable on the increase in the value of a business asset, for example agricultural land and buildings, business property, shares and goodwill.

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 two rates of Capital Gains Tax dependent on the particular circumstances giving rise to the gain: 10; 18 and 20 per cent. Each individual making a taxable gain has an exemption of £11,100 of a gain but if the vendor is a trust the exemption is only £5,550. 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 agricultural and 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 agricultural land 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 agricultural land and 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 agricultural land or business property is eventually sold.

Where the farmer or 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.

Agricultural land which has been let on conacre is being sold or gifted to the next generation may be the subject of enquiry when the capital gains computation is field, depending on what reliefs are being claimed. The recent tax tribunal care of JC Allen emphasised the importance of maintaining evidence of work done to the land either by or on behalf of the owner for the purpose of husbandry.

The Allen case also stated that the location of land, for example, on the outskirts of a town, does not affect the status of the land for capital gains tax purposes, provided there is evidence of work being carried out on a regular basis by or on behalf of the owner. Occupation wholly or mainly for the purposes of husbandry is the primary test.

Capital gains tax planning is a key ingredient in implanting effective exit and succession strategies. Seeking timely advice ensures that the farm business can avail of the many capital gains tax reliefs which are available.