Until recently, tax rates were in harmony. Inheritance Tax, Capital Gains Tax and Income Tax all had a marginal rate of 40%. But with the marginal rate of Income Tax for individuals now at 50% as opposed to 28% for Capital Gains Tax (or 10% if Entrepreneurs Relief can be claimed), falling into the wrong tax regime can be costly.
A straight sale of land for development will normally give rise to a charge to Capital Gains Tax. Similarly, an option fee paid by a potential development will also be chargeable to CGT (with a nil base value).
For the reduced Entrepreneurs’ Relief rate of 10% to apply, on cessation of the farming business, the land needs to be sold as an integral part of the process of disposing of the assets. If the whole of the farm is being sold for development, this should not be a problem. However, if only part of the land is being sold, the relief will not normally apply unless the land can be carved out into a separate trade (perhaps a new farming partnership with members of the family) well in advance of any disposal.
Taking reasonable steps to enhance the value of the land in preparation for sale is prudent; but too much preparation might deem you personally involved in the development of the land. The profit derived from a development project may be liable to Income Tax – even if it is a one off.
Of course, Income Tax implications or none, personal involvement in the development of the land might secure the best return. Indeed, with Corporation Tax rates at their lowest for several years, there might be a case for incorporation of the development project; but be prepared for an SDLT charge on transferring the development land to the Company.
Finally, a word about Inheritance Tax. Agricultural Property Relief will only exempt “agricultural value”. Hope value, or the value of the land attributable to the grant of planning permission will not qualify for APR – but provided use of the land for the purposes of the farming enterprise can be established, Business Property Relief should come to the rescue.