Increased land values – Beware the Capital Gains Tax consequences

A combination of increased land values and changes in Capital Gains Tax (CGT) rules in recent years means that the amount of tax which Scottish farmers face paying on a disposal of land is vastly increased.

CGT is calculated on the difference between sale price and acquisition value. Thus where land was purchased or inherited many years ago it will almost certainly show a large capital gain. By way of example, figures were published recently which show that on average Scottish land has increased by 220% in the last 10 years from £1332 per acre to £4262. Much of the land that comes onto the market will have been owned for more than 10 years and will show even bigger gains.

There are three possible rates of CGT when land is sold:

• 10% tax rate where there is a sale of business assets qualifying for Entrepreneurs’ Relief.
• 18% tax where the disposal does not qualify for Entrepreneurs’ Relief and a person’s income plus capital gains does not exceed the higher rate threshold for Income Tax.
• 28% tax on gains which do not qualify for Entrepreneurs’ Relief and exceed the basic rate threshold for Income Tax.

As the basic rate band for Income Tax is only £31,865 it can be seen that unless Entrepreneurs’ Relief is due, most sales of land will be subject to 28% CGT. Thus if a farmer can ensure that a disposal of land will qualify for Entrepreneurs’ Relief, the amount of tax payable will reduce by almost two thirds.

Not all disposals of business assets qualify for Entrepreneurs’ Relief and in general the sale of a few acres with the farming business continuing on a reduced scale will result in 28% tax being payable. The Entrepreneurs’ Relief legislation is extremely complicated and there are several ways of obtaining a 10% rate of tax. It is therefore essential to take professional advice well ahead of the sale so that it can be structured in such a way as to minimise the tax payable.

Tom Riddet, Partner, Dumfries