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bigduckontax
bigduckontax, Accountant
Category: Tax
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My elderly parents live & farm in Scotland & they have transferred

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My elderly parents live & farm in Scotland & they have transferred the title of the whole farm (including the house) they still run as a business to themselves in liferent and to me & my brothers equally in fee. My question is have they made a disposal for Capital Gains Tax? Unfortunately the lawyer that did the work doesn't know the CGT implications & could only comment on the IHT position
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
Firstly, if your parents have suffered any loss as a result of their solicitor's ignorance then sue in the Sheriff Court to recover damages. Secondly report the solicitor to the Law Society of Scotland for incompetence for failing to give advice on the CGT implications.
The transfer of the property is a disposal for CGT purposes and any gain on the farm made is taxable. PRR almost certainly applies to the residential parts. However, this gain is probably entitled to Entrepreneurs Relief which limits the tax to 10% on the gain as opposed to the normal 18% or 28%. Please note the comments of Rix and Kay Solicitors on this matter:
'The rules for successfully claiming ER are complex and there is a particular difficulty where a business is carried on by an individual either trading as a sole trader or in partnership with other individuals. Of course many farmers choose to operate their business in precisely these business models. Aside from situations where the farming business of the individual sole trader or the farming partnership ceases on the sale of the whole of the farming business, the sale of an asset from the business is not likely to be eligible for ER and so the usual CGT rates (and more likely the full rate of 28%) could be payable on the gain arising from the sale. This is a common problem for farmers. - See more at:'
http://www.rixandkay.co.uk/2013/02/01/farmers-capital-gains-tax-availability-for-entrepreneurs-relief/#sthash.TOg8pIJP.dpuf
From the tenor of your question Entrepreneurs Relief apples.
I have not mentioned IHT as you appear to have received professional advice on that matter.
I do hope I have opened your eyes to some of the taxation problems your parents could face. I am so sorry to have to rain on their parade.
Customer: replied 2 years ago.
Thanks for the reply.
As my parents are still farming and making tax returns so still declaring the income arising it appears to me that there hasn't been a disposal of a business so they wouldn't be entitled to ER. This then leads you to question has there actually been a disposal or can it be deemed to be a bare trust where we as sons are merely legal owners on paper but dont have authority to do anything without our parents permission? The legalities of 'liferent' & 'fee' are peculiar to Scotland & I assume you are quite familiar with them as I have to say I find them a bit confusing when it comes to 'beneficial ownership' which I think is different in England
Expert:  bigduckontax replied 2 years ago.
The disposal of the business or rather the lack thereof is irrelevant. Unfortunately it is the disposal of the landed property which attracts CGT and a transfer of the title to the pair of you is a disposal.
It is just possible, and I say only just, that HMRC might accept that the disposal and the lease back by the pair of you at a peppercorn rental as you are indicating constitutes a new business venture on which case Roll Over Relief could apply and would postpone the payment of CGT until your parents cease their business activities at some future, indeterminate date. I am of the opinion that HMRC would view a suggestion of this nature with a very jaundiced eye and it is unlikely to be successful; you could always run it across your local inspector though. The fact that the business is continuing might assist in the argument.
Yes I know all about liferents; I live in Scotland. They have them in England and Wales too, but there they are a form of equitable title to land; tenancies for life or at will, there only being two types of full legal land holdings there, an estate in fee simple [a solum North of the Border] or a tenancy for a term of years.
I do hope this has expanded your knowledge. Please be so kind as to rate me before you leave the Just Answer site.
bigduckontax, Accountant
Category: Tax
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.
Customer: replied 2 years ago.
From an email I've just rec'd I seem to have been given another bight at the cherry!
So to update you ive been in touch with the lawyer who appears to think what he's done is a way of avoiding paying for the cost of the full nursing home fees (should my ageing parents end up in such a place) which he says would be effective after 5 years. I've spoken to another lawyer & what he seems to be talking about is an Insolvency thing about gratuitous alienations as I believe Highland Council (the local authority involved) will go back at least 10 years & look at such gifts & claw back fees incurred from the owners of such gifted property.
So what I'm thinking now is along the lines of the last point you made but actually have a full conveyance done back to my parents & claim Rollover Relief. It might be better to go for HMRC clearance as the accountant involved thought that would be caught by new Anti Avoidance legislation but we're not talking about Amazon or Starbucks so I don't see that?
Thanks
David
Expert:  bigduckontax replied 2 years ago.
Here is the opinion of Shepherd and Wedderburn, a renowned firm of Scottish Solicitors:
'The subject of gratuitous alienations is a problematic area for the property practitioner. Timing is all-important, and often it only becomes an issue for insolvency reasons retrospectively. Put simply of course, in lay terms a gratuitous alienation is no more than a gift, and there is nothing to prevent an owner of property gifting it to someone if he chooses. However, where the donor was insolvent at the time of the gift, or within a period following the gift, the expression "gratuitous alienation" has a specific meaning, and a transfer of property which constitutes a gratuitous alienation is challengeable by a creditor or the trustee in sequestration in the case of individuals, or the liquidator or administrator in the case of companies, and may be reduced. The asset does not need to have been transferred for nothing. A transfer where a price is paid, but is under the true value of the property, can also be caught by the rules.'
It would appear to kick in only if the donor were insolvent at the time of the gift and this is not the case here. In any event the relevant time factors are [same source];
'In both personal and corporate cases there are time limits imposed during which a gratuitous alienation may be challenged by a creditor, trustee or liquidator or administrator, and this will depend on the relationship between the debtor and the recipient. The periods are:
'Five years when the recipient is an associate of the debtor, or
Two years for any other recipient.
In both cases the period is counted from the date of sequestration or granting of a trust deed, or the date on which the winding up of the company commences, or the date it enters administration.'
I would submit that were there to be an insolvency outwith those parameters Highland Council should be told to take a running jump, but it realty your follow up question is a matter for a legal professional, not an accountant.

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