Business Clinic: Can we get business asset disposal relief on our plans?

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

Sarah Dodds, partner and agriculture sector lead at accountant MHA addresses a family farming situation which raises many questions

See also: Business Clinic: IHT implications of mother moving back into gifted farmhouse

Q. We have a farm with an additional 34 acres, all owned by my mother. The land is mainly in arable crops and was managed by my late father who also had beef cattle.

Following his passing in 2021, my mother, sister and I formed a partnership in April 2023. This has only been made official by a joint bank account.

We have decided to let the main farm on a farm business tenancy.

My mother will sell the 34 acres and distribute part of the proceeds to myself and my sister as gifts. The remaining funds will be reinvested in the farm.

We also plan to sell about £350,000 worth of farm machinery by auction in October.

My father sold another farm for £750,000 and successfully claimed entrepreneur’s relief on this transaction.

Is it possible for us to claim business asset disposal relief (BADR), to help mitigate our tax obligations? We would be very grateful for any further advice on our plans.

A. A query about one aspect of taxation often has implications for other taxes and this question does precisely that.

On the specific query, it is possible for the capital gains tax (CGT) liability on the sale of a business to be reduced from the normal 20% rate to 10% under the BADR provisions where certain conditions are met.

These include:

• You must be a sole trader or business partner
• You must have owned the business for at least two years
• The disposal of the asset owned by the individual must be related to the individual’s reduction of their interest in the assets of the partnership

It is not clear that all the conditions have been satisfied if the partnership was formed in April 2023 and is only evidenced by a joint bank account. This suggests the conditions for BADR may not be met until April 2025.

What happened between the date of your father’s passing and the date the partnership was formed?

If your mother had formerly been in partnership with your father, or immediately began trading on her own account, then she may meet the two-year test.

In reality, the position may be less clear cut. It would be useful to see any evidence to point to a partnership between 2021 and 2023.

The joint bank account is helpful, but other evidence such as VAT registration, invoicing, Defra registration and self-assessment returns may all be more persuasive.

Assuming the ownership point above can be satisfied, there must also be a material reduction in the seller’s interest in the partnership.

How this can be achieved will depend on whether the land being sold is a personal or a partnership asset.

BADR needs full cessation

You mention that some proceeds will be reinvested back into the farm. This suggests the business will continue and therefore there will not be a full cessation at the date of sale, which BADR requires.

Regarding the proportion of sale proceeds to be gifted to you and your sister, we assume this will be enjoyed personally, rather than reinvested in the farm in your own names.

In this case, it will be a potentially exempt transfer and will remain in full on your mother’s inheritance tax (IHT) record for seven years.

If your father died less than two years ago, you may be able to vary your father’s will to pass a share of the land that is to be sold directly to you while it qualifies for relief, thus removing the risk on your mother’s IHT position.

IHT relief

In respect of your mother’s wider estate, the movement from farming “in hand” to letting the land under an FBT will mean that only agricultural property relief rather than business property relief from IHT will be available for the partnership.

This will only be an issue if there is any “hope” or development value on the land or if you have any other enterprises (such as barn rental) within the business.

Finally, if you sell £350,000 of farm machinery, this will lead to a substantial income tax charge (unless you buy replacement kit within the same year).

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