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Farmhouse quandary

20 December 2000
Issue: 3788 / Categories:
Farmhouse quandary

A farming partnership owned and occupied 125 acres of agricultural land and buildings for the purpose of dairy farming.
One of the three partners (Joe) in the farm, resided in the farmhouse which has been sold during this tax year. Five acres of land and all the farm buildings were sold at the same time, and fifty acres were sold last year.
Farmhouse quandary

A farming partnership owned and occupied 125 acres of agricultural land and buildings for the purpose of dairy farming.
One of the three partners (Joe) in the farm, resided in the farmhouse which has been sold during this tax year. Five acres of land and all the farm buildings were sold at the same time, and fifty acres were sold last year.
The land and the farm buildings will qualify as a business asset for capital gains tax purposes. However, I would be interest in readers' comments and experiences on whether Freddy and Jack (the two partners who did not reside in the farmhouse) can claim business taper relief on any element of the farmhouse, and/or can any of the gain on the farmhouse be rolled over? I assume that Joe can claim principal private residence relief on the whole of his share of the farmhouse.
(Query T15,730) – Anna Rack.


This is a problem for many farming families where a house is occupied by one partner but owned by all partners. In this instance there are three separate interests which need to be further subdivided to establish entitlement to appropriate taper rates. It is assumed the property is owned as to one third each by the three partners, and that for simplicity 30 per cent of the farmhouse is used for business. So far as the outbuildings are concerned (and the land, subject to the point below) all three partners will be in identical positions; they are entitled to business taper and can make rollover claims. It is the interests in the farmhouse which provide the complications. Is any part of the land able to be treated as appropriate to the farmhouse and thus, in part, eligible for private residence exemption? Five acres is more than the area permitted by section 221(2), Taxation of Chargeable Gains Act 1992 but if the area can be extended beyond half a hectare then any gain attributable to Joe's interest may be tax free. Against that must be balanced the possible loss of rollover opportunity in respect of the interests of Freddy and Jack.
Joe will be unable to claim private residence exemption on all of his share of the farmhouse because part is used for business and part for private purposes, so an apportionment under section 152(6), Taxation of Chargeable Gains Act 1992 will be required to treat the business and non-business parts as separate assets; where an asset has not been used consistently throughout its period of ownership section 152(7), Taxation of Chargeable Gains Act 1992 requires further analysis but that does not seem to be the case here. Joe owns one third of the house, of which 10 per cent is business. Thus business taper will apply to the 10 per cent element and the remainder will be eligible for private residence exemption (and non-business taper). Thus rollover may be available for the gain not covered by residence exemption.
So far as Freddy and Jack are concerned, they can claim business taper (and rollover) in respect of the 10 per cent used for business. However, the remainder is only eligible for non-business taper, being Joe's home; additionally any gain will not be eligible for rollover.
As a rule of thumb many practitioners take one third as the business element of a farmhouse and it would seem that, equally, many Revenue officers accept the position. Thus section 124(1)(a), Capital Allowances Act 1990 allows agricultural buildings allowance on one third of eligible expenditure except where the facilities are not proportionate to the size of the farm. 'Anna Rack' needs to apply a similar just and reasonable test to establish what is a fair business proportion for capital gains tax purposes. Where do Freddy and Jack live? If the farm is contracting, what type of farmhouse is appropriate?
No element of the gain seems eligible for retirement relief. The facts seem well within McGregor v Adcock [1977] STC 206 territory. Finally has the business ceased with the result that entitlement to business taper on both the farm buildings and the business element of the farmhouse has ceased? If yes, then the usual time apportionment of the post April 1998 gain will apply. – Flipper.


The agricultural aspect of the farmhouse here is not diminished by the fact that two of the three partners did not reside in it. A helpful commentary from the Capital Taxes Office as to the identifying characteristics of a farmhouse (for inheritance tax business property relief) appeared in Taxation's Feedback column, 15 June 2000 at page 277.
The Revenue regards a farm as a single entity irrespective of its origins (see comments in Part III of 'A Beginner's Guide to Taper Relief' by Malcolm Gunn in Taxation, 13 August 1998 at page 524). Hence the disposal of the fifty acres last year was a part disposal of the whole farm. The recent disposal of the farmhouse, farm buildings and five acres was a composite part disposal, apparently leaving some seventy acres unsold.
In passing, it may be remarked that, if any of the partners qualified for retirement relief, that disposal of land and related livestock would signal the last opportunity for a claim (see Wase v Bourke [1996] STC 18).
Freddy and Jack obtain business taper relief on all the chargeable gains from the part disposals of the farm, without distinguishing any element applicable to the farmhouse.
The mention of rollover suggests that some alternative farming activity is in contemplation but, unless the partnership continues, the occupation test may not be satisfactorily met.
Section 222(1), Taxation of Chargeable Gains Act 1992 extends relief to an interest in a private residence. – Bear.

Editorial note. For further research regarding this complicated issue, readers may find the following two Butterworths Tolley books useful. They are Tax Planning for Private Residences by Matthew Hutton which devotes Chapter 8 to the farmhouse, and Roll-over, Hold-over and Retirement Relief by Ken Tingley.



Issue: 3788 / Categories:
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