Business Clinic: What are the legal and tax issues on a gifted barn?

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

Tracey Ashford, legal director and property specialist at law firm Thrings, and Carly Drummond, senior tax manager MHA, address the legal and tax issues respectively

See also: Business Clinic: Advice on plan to sell farm at discount on death

Q: We bought the farm in 2008. I promised a dilapidated, redundant building to my son if he could get planning permission granted to convert it into a home. Last year he applied for planning in his name and acquired the permission in October 2022. I have no written documentation of the transfer of ownership giving him the land and redundant building. I am now querying whether this could have exposed the land to an uplift in value and therefore could have accrued capital gains. I would like to know if we could be liable to this or if there is a way of avoiding it. Also, if the gift was not recorded until my death or the sale of the farm, would this affect the position? Any other advice on our position would be very welcome.

Tracey Ashford, legal director and property specialist at law firm Thrings addresses the legal issues

A: You made this promise to your son with the best of intentions, but as a result have found yourself in a very complex area of law. Here is some context and guidance on the legal status of the gift and your options.

Gifting in your lifetime

For any gift of land made during your lifetime to have legal effect, it must be made by deed and formalised in a written document containing all the terms of the gift and signed by all parties.

If you are gifting a part of the land rather than the whole registered title, then it is essential for any transfer to attach a plan, compliant with Land Registry guidance, clearly showing the land being transferred.

The transfer must be recorded with the Land Registry within two months of the date of the transfer.

Leaving the land in your will

An alternative is to leave the land in your will, although this will mean that the gift will not take effect until after your death.

Your son may not be happy with this if he wishes to invest in construction of the house now. It gives him very little security as you are free to change your will at any time while you have capacity.

If there is a dispute

If you do neither of these (formally gifting in your lifetime or leaving the land in your will) you could become exposed to a complex area of law known as proprietary estoppel.

I mention this here as a precaution, as it is a growing area of litigation for farming families.

Proprietary estoppel is a legal doctrine which prevents a party from departing from (that is, breaking) a promise made to another with regard to land or property where the legal formalities for the transfer haven’t been complied with.

Several requirements must be met for this to be proved:

• It must involve a clear promise, which in your case is the promise of the gift of the land and redundant building
• Your son must have relied on the promise when making decisions – here it would seem he did rely on the promise by going ahead with the planning application
• Your son must have suffered some detriment as a result of his reliance on the promise – there would seem to be grounds for this because he would have incurred the costs of obtaining planning permissions, and any subsequent costs in building, relying on the planning permission
• The court also must make a judgment on whether it would be “unconscionable” – that is, wrong or unreasonable – for you to deny his claim to the land.

If your son were successful in such a claim, a court could order a transfer of the land to him, or a financial award to the value of the land and building.

As an alternative to a proprietary estoppel claim, your son may be able to argue that he already has an interest in the land, even though it remains legally in your name, under a “constructive trust”.

This means there was a common intention between the two of you that he would be the owner of the land, and in reliance of that intention, he proceeded with the planning application.

The recommendation

This is only an overview of the legal issues you may need to consider. I recommend talking through the details with a lawyer who specialises in property, inheritance and proprietary estoppel.

You also need to make your decision in the light of any tax advice.

Depending on this advice, the best course of action may be to protect yourself and your son by formalising the gift now by way of a formal transfer, to reflect the intentions of both parties and avoid scope for dispute in future.

Carly Drummond, senior tax manager, MHA, addresses the tax issues

There are legal issues to be considered first and foremost. If the transfer is deemed to have legally occurred, was it reported at this point for tax purposes?

If not, HMRC needs to be updated and the disposal reported with any capital gains tax (CGT) and late payment interest being settled.

The CGT will be calculated on the open market value at the date of transfer, less your purchase price.

It is likely in the above scenario that if the transfer did happen at the same time as purchase, no gain would arise and therefore no tax would be due. Reporting requirements would be dependent on your own personal circumstances.

However, if beneficial interest was not transferred in 2008 and the property is still beneficially owned by you (beneficial and legal ownership being separate legal terms which we will not go into here), any uplift in value realised in respect of the planning permission now granted will have accrued to you.

This will be exposed to tax in your hands for both CGT and inheritance tax (IHT) purposes.

Valuations 

Any transfer of this property now would be deemed to occur at open market value and therefore the barn with planning permission would need to be valued. The gain would be chargeable on the gift to your son and would be taxed on you.

It is possible that you may be able to offset the costs of obtaining planning permission, subject to how these costs were invoiced.

Should you die before a transfer, the planning uplift, and indeed any uplift in respect of future development, would likely form part of your estate and could be charged to IHT, subject to availability of nil rate bands (NRBs) and agricultural property and business property reliefs (APR and BPR).

Without knowing more about the farm and your business, I cannot here comment on whether this would qualify for BPR, but it sounds as if APR would be doubtful as it’s not currently being used for agricultural purposes.

If BPR is not available, it is possible that the uplifted value would be subject to IHT at 40%. Subject to the IHT due, if left to your son, he would then inherit the property with an uplifted base cost and would not be subject to CGT should he sell it on with no further inflated value.

Options for mitigating tax would depend on whether the building is currently being used in your farm business and whether your business is deemed to be substantially (80% or more) trading in nature.

If the barn is a business asset, then reliefs may be available on the gift. These would either defer the CGT or reduce the rate of tax to 10%.

These would be circumstantial, and a more in-depth look at your position would be needed to assess their availability.

Trust option

Another option would be to gift the barn into a discretionary trust, which would crystallise an IHT event.

This would not result in a tax charge as long as the value was less than your available NRB (£325,000 as an individual or £650,000 as a couple).

A CGT event would also arise, but this could be deferred. The barn could then sit in trust for your son and possibly be taken out of the trust at a later date with a similar nil tax charge.

The caveat here is that this can have an impact on the potential of your son to claim principal private residence (PPR) relief in future, should he choose to convert and live in the barn long-term.

Case-specific advice should be sought if this is something you would wish to pursue.

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