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bigduckontax, Accountant
Category: Tax
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We have a client who runs an oil distribution business and

Customer Question

We have a client who runs an oil distribution business and a small farm , both as a sole trader. The farm consists of thirty six acres. Six acres have recently been sold at £400,000 for industrial use. Can our client gift the remaining thirty acres and associated farm assets to his son, (claim gifts relief), cease business as a farmer and avail of entrepreneurs relief on the £400,000
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.
Here is the HMRC guidance on the subject of gifts:
'If a person transfers an asset to another person for nothing, that is a gift in the strict sense and is a disposal otherwise than by way of a bargain at arm’s length.
If you receive something for transferring an asset but the consideration is less than its market value, this is also a disposal otherwise than by way of a bargain at arm’s length.
In both cases you will be treated as though you had disposed of the asset for its market value.'
So there is a liability to Capital Gains Tax (CGT) on these transactions. It will be assessed on the gain, in other words the current market value less the acquisition price. The element which is agricultural land would be subject to Hold Over Relief. Here is HMRC's example of how this relief works:
'You give an asset worth £50,000 to your brother. It cost you £17,000. The chargeable gain is therefore £33,000. If a claim is made by you and your brother, you do not have to pay tax on your chargeable gain, which is known as the ‘held-over gain’. Instead, your brother’s cost for the purposes of calculating his Capital Gains Tax liability on any future disposal of the asset, which would normally be its value of £50,000, is reduced by the amount of the held-over gain, £33,000, leaving a base cost of £17,000.'
Entrepreneurs' Relief (ER) is a trifle more complex. Essentially the person claiming it must have been in at the ground floor so to speak. If they are held to be merely carrying on an existing business. Here is HMRC advice on the subject, relevant when the owner is going out of business:
'You must have owned the business directly or it must have been owned by a partnership in which you were a member throughout the qualifying period that ends on the date the business ceased. Additionally the date the business ceased must be within the period of three years before the date of disposal of the asset.'
The effect of ER is to deduce the rate of tax to 10%, much better than the normal 18% or 28%. Please remember that CGT applies only to the gain, not the selling price so your client would be exposed to 400K + market value of the farm less acquisition price @ 10% [assuming ER available].
I do hope I have helped throw some light on your question.