Business Clinic: Is CGT due on sale of long-held farm building with planning?

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Mark Chatterton of accountant Duncan & Toplis advises on the capital gains tax implications of an inherited farm building on which residential planning was obtained before its sale

Q I would appreciate an opinion on the following please. A farm building is valued at £100,000 for probate. The widow owns 50%, while two of her children own 25% each, following the death of their father.

After his death, residential planning was obtained on the building and it was sold for £194,000.

As the mother has owned her 50% share for more than 30 years, does she still have to pay capital gains tax on her 50% share?

A The question is quite interesting and complex and reinforces the need for sound tax advice. For the most part, the question revolves around the availability of Principal Private Residence (PPR) relief to the widow and whether her children may also benefit.

In brief, when an asset is sold and a gain is made, the individual selling the asset would be expected to pay Capital Gains Tax (CGT). When selling a property that is classed as the individual’s main residence, no CGT is paid due to PPR relief.

See also: More answers to readers’ legal, insurance, tax and management questions

PPR may also exempt the sale of land or buildings within the permitted area of the property.

The legislation defines the “permitted area” as up to half a hectare, although HM Revenue & Customs (HMRC) has recognised that this restriction may unduly prejudice larger estates.

From the information provided, it is assumed the widow has occupied the farmhouse as her main home throughout her period of ownership, although her two children may no longer be living at the property and therefore the possibility of a PPR claim for them would be excluded.

To establish whether a PPR claim is available to the widow, it must first be determined whether the building falls within the permitted area and has been used for residential purposes and not for the purposes of the farming trade.

If it has been used as part of the main dwelling, the widow may benefit from PPR such that no CGT would be payable on the sale of her share in the property. 

However, if the building falls outside of the permitted area or has been used for the purposes of a trade, CGT would be payable.

If the property has been used for a trade, so PPR isn’t available but it forms part of the permitted area of the property, the higher rate of CGT (18% or 28%) may be payable as if the building was already a residential property.

Alternatively, a lower rate of CGT (10% or 20%) would apply if the building does not form part of the permitted area.

Assuming the widow has a base cost of say £10,000 for the building, her tax position may be as follows:

Regarding her childrens’ tax, it is unlikely that they will be able to claim PPR on the sale of the property, and so based on the figures outlined, their position may be:

In the above scenarios we have assumed that the probate value has been agreed with HMRC and is not likely to be challenged. Be aware that HMRC challenged probate value in a recent court (Palliser v Revenue and Customs 2018) where planning permission was later obtained.

The tribunal concluded that ‘hope value’ should be taken into account for the purposes of a valuation for probate and HMRC uplifted the probate value to include an element of hope value.

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