Business Clinic: CGT issues for tenant farmers renting out houses

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help. Carly Drummond, senior tax manager at MHA, advises on the tax implications of tenant farmers renting out their own houses.

Q. I am an FBT tenant of 20-plus years on a 300-acre grass and arable farm. The farm has no house and so, when 20 years ago, a house on the same estate came up for rent next to the farm’s grain store, I took this on as a private tenant as I was happier living on the job and renting out my house in the village.

There is no connection between the house I occupy and the tenancy of the land, which is part of a partnership with my brother who farms another holding in the partnership. This second farm has a house and is an old AHA tenancy, my brother being the second generation.

The partnership pays for the land I rent. I pay solely for the rented house that I occupy and which has no connection to the partnership.

I am now semi-retired and have decided to sell my house and move from my rented accommodation into another house. My accountant has said there will be a big lump of capital gains tax (CGT) to pay when I sell, as I have rented my house out for 20 years. Is there a way round it by saying I needed to be on-farm for livestock husbandry and machinery security purposes?

My brother’s tenancy requires him to live in the farmhouse and he has rented out his own house for 22 years so far, but it could be another 10 years until he retires. Will he have a CGT problem?

The question here highlights an interesting differentiation between the tax treatment of tenants of AHA and FBT tenancies.

As we know, there have long been distinctions between the two in respect of Inheritance Tax, succession, security of tenure and so on. However, there is another variation between treatment to highlight here.

See also: Business Clinic: how will I be taxed on plot sales cash?

Very simply, where a house is provided within an AHA tenancy, it is deemed to be job-related. As you have explained above, your brother’s tenancy requires the tenant to occupy the house.

Usually Principal Private Residence Relief (PPR) will only remove a capital gain from charge where the only or main residence has been sold.

To qualify as the only or main residence, it will usually need to have quality of occupation and be considered the permanent home of the seller (even if just for a short time).

Job-related accommodation

One of a few variations to the above rule is where an individual is required to occupy job-related accommodation, which prevents them from occupying the property that would otherwise be their main residence.

Therefore, it would be a fair to argue that should your brother sell his home, PPR would not be denied because he has lived elsewhere in a tenanted property for many years. This is on the basis that his intention was to always make his owned property his home.

In your case, however, the tenancy does not require you to live on-site and although you choose to do so, it would be very difficult to argue this was the case when the property has no direct link to the farm.

In lieu of the job-related accommodation angle, it would be very hard to argue that PPR should apply at all in the case of an FBT, even though it has been a very long-term arrangement.

Possibility of small relief claim

There would potentially be a small amount of PPR available to be apportioned over the whole gain arising for the period when you actually occupied the property you own (and the final nine months, which is statutory for any home where there has been some element of PPR).

One option may be to reoccupy the property prior to sale to try and gain one of the more general exemptions for periods of absence, but this would probably only see a proportionately small saving and the hassle of it may well outweigh the benefit.

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”.