Tax problems with farm cottages

It is commonplace for farming families to have a complicated property ownership history. This can result in a position where not everybody knows who owns a particular property and for family members to be living in houses owned by someone else. It worth then considering the tax consequences that can arise.

Capital Gains Tax on sales

If an individual sells a property that they have occupied as their main residence, any capital gain is normally exempt from tax. This means no tax is payable. However, if the property has been lived in by another family member, the capital gain is taxable. Where the property has been owned for many years, there is likely to be a large gain and the rate of tax is either 18% or 28%.

Cost of Improvements

It is not uncommon for improvements to a property to be paid for by the person living in it, though they might not be the owner. When calculating the capital gain, the cost of improvements can be deducted only if they have been incurred by the owner of the property. Complications can also arise when a property is owned by an individual but improvements are paid by the partnership.

Can gains be rolled over?

When business assets are sold and the proceeds reinvested into replacement assets, rollover relief can be used to defer payment of Capital Gains Tax. However, to qualify for rollover, both the asset sold and replacement asset need to be business assets. A property occupied by an employee of the business is classed as a business asset, but one lived in by a partner of the business does not qualify. The position gets even more complicated when a property has been owned for many years and different people have occupied it at different times.

Can properties be gifted to solve the problem?

This is a complex area. Where family members jointly own several residential properties, it is sometimes possible to exchange interests so that each person solely owns the house they are living in, without incurring a tax liability. Additionally, if a cottage is gifted alongside farmland and buildings, holdover relief can be due to defer the capital gain until an eventual sale.

There are also a number of non-tax issues to consider before gifting properties to family members. These include updating wills and partnership agreements to protect assets as far as possible from family disputes and divorces.

As always, it is essential to plan ahead and take specialist advice as high property values mean there is the potential for large amounts of tax payable on property sales.