Business Clinic: How assets get different tax treatment

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 the different tax treatment of private and partnership property.

Q. My brother and I, together with our families, farm as a partnership, largely on land which my brother and I own personally and which our father gave to us on his death. I was reading about the difference between land held personally and by a partnership, and that we cannot claim entrepreneurs’ relief if we sell the land and that we’d get no inheritance tax relief on our deaths. Is all this true?

A. In a word, no. However, the tax differences do vary. It’s common for partnerships to farm land which is owned personally by one or more of the partners, as opposed to owned by the partnership as a whole. It’s a subtle difference and one which makes little odds day to day, but the tax treatments are different.

Entrepreneurs’ relief, now blandly called business asset disposal relief or BADR since April 2020, is still available for land or any other farming asset that is owned personally but used by that owner’s partnership.

See also: Business Clinic: how to split capital gain on farm cottage

This relief essentially reduces the capital gains tax (CGT) liability when all or part of a business is sold or otherwise disposed of, for example through a gift.

BADR reduces the CGT rate to 10% on £1m of gains in a lifetime (reduced from £10m with retroactive effect also from March 2020) for ‘associated disposals’, as the sale of such personally owned assets are termed.

Withdraw from business

However, it is only available if you withdraw from the business as part of the sale. This means you would need to dispose of at least 5% of your stake in your partnership as well.

You cannot maintain your current position and simply sell off the land and claim the relief. Even if the land were a partnership asset, you would need to sell a share of your partnership to benefit from the relief.

BADR/entrepreneurs’ relief is largely a reincarnation of the old retirement relief, which gave the tax relief on the basis of one’s retirement. This intention is present in the current legislation by the criterion of your having to retire from the partnership – at least to some extent – as part of the sale.

It makes a big difference whether you, and/or your brother, charge the partnership any rent. If you do charge market rent, then no BADR is available for an “associated disposal” at all under any circumstance.

A peppercorn or nominal rent will not affect any BADR claim; any rent charged between that and the market rate will affect a claim on a proportionate basis.

Inheritance tax conditions 

As for inheritance tax (IHT) relief on your deaths, as long as the land is being farmed by your partnership for at least two years prior to your deaths, the agricultural value of the land will be covered.

What might not be covered is the non-agricultural value above that, for example any “hope” or development value.

Regarding the value of your partnership share, 100% business property relief (BPR) from IHT is available for this, which would include the land if it were a partnership asset.

However, the land is in your and your brother’s personal estates and any such assets merely used by a partnership only attract 50% BPR. So half of the non-agricultural value will be chargeable for inheritance tax purposes.

Partnership property solution

There is an easy way to resolve these issues, which is to make the land partnership property, assuming any mortgage lender is happy with this.

Partnership property is defined as being assets bought/acquired by the partnership or originally introduced as partnership stock. In your case, you could gift your land to the partnership, which means to the other partners.

This can be done with no tax payable. However, the other members of your and your brother’s family would then have a share over your land, which might not be desirable.

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