Business Clinic: Will lowering sale price for buyer affect CGT?

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help. Chris Thorpe of Moore Scarrott advises on how the sale price of a farm affects the capital gains tax bill.

See also: Business Clinic – how assets get different tax treatment

Q. If I sold my farm at an undervalue to accommodate a purchaser’s budget, would I reduce my capital gains bill by selling below market price?

A. Yes, you would. Capital gains tax (CGT) is a tax on the profit on the sale of the farm, so if you accept a lower price, the profit will be lower and the CGT too.

Assuming that you and the buyer are conducting this transaction at arm’s length (in other words, you are not related nor connected in any way), you can agree whatever price you like to sell your farm.

HMRC is highly unlikely to intervene and will accept your actual sale proceeds figure when calculating your CGT.

That said, this generosity toward your buyer will only stretch so far before HMRC might intervene. If HMRC believes there is what it calls “bounty” or a “gratuitous benefit” involved, it will disregard your lower price and instead impose an open market value (or what the district valuer regards as such). It will do this even if the deal is otherwise at arm’s length.

Bounty and gratuitous benefit essentially mean that you are showing the sort of kindness that one wouldn’t normally show to strangers in a purely commercial transaction and, as such, there must be something suspicious going on.

If HMRC concludes that the deal is anything but fully commercial, it will substitute its own figures and you would end up paying more CGT than your actual sale proceeds warrant.

There is also potentially an inheritance tax (IHT) issue in this scenario. As you would be deemed to be making a gift of the discounted amount, this would count as a transfer of value for IHT purposes.

In reality, however, if this were to happen, a fully working farm would most likely be entirely exempt from IHT by virtue of agricultural and business property reliefs. So that is probably not a consideration worth worrying about.

Assuming that the discount you have offered your buyer remains within the broad open market value of the farm, then what I’ve described above about HMRC substituting a market value is very unlikely to happen.

As such, the actual sale proceeds figure would be used in your CGT calculation and the lower that is, the lower your tax bill will be.

Do you have a question for the panel?

Outline your legal, tax, finance, insurance or farm management question in no more than 350 words and Farmers Weekly will put it to a member of the panel. Please give as much information as possible.

Email your question to FW-Businessclinic@markallengroup.com using the subject line “Business Clinic”.