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Replies to Queries - 2 - Farming family

20 June 2001
Issue: 3812 / Categories:

Our client, a widow, farms in partnership with her son. In April 1990 she inherited a one-third share in both 238 acres of farmland (then valued in total for all the three shares at £360,000) and two let cottages (then having a freehold value of £40,000). Her two brothers-in-law owned the other two-thirds shares.

Our client's partnership has farmed 80 acres of the 238 acres since 1990, as being applicable to her one-third share and the partnership has paid her rent for the use of the land.

Our client, a widow, farms in partnership with her son. In April 1990 she inherited a one-third share in both 238 acres of farmland (then valued in total for all the three shares at £360,000) and two let cottages (then having a freehold value of £40,000). Her two brothers-in-law owned the other two-thirds shares.

Our client's partnership has farmed 80 acres of the 238 acres since 1990, as being applicable to her one-third share and the partnership has paid her rent for the use of the land.

In 1998 all parties decide to unravel the tenancy-in-common over the 238 acres and the following was implemented:

Value

95 acres transferred to our client outright

£208,000

103 acres purchased by son from the brothers-in-law

£225,000

40 acres transferred to the two brothers-in-law jointly

£64,000

Two cottages transferred to the two brothers-in-law

£82,000

The proceeds of the sale to the son were paid to his uncles. No amounts were paid to our client and thus in return for giving up her one-third share in 238 acres and two cottages, our client received in exchange the full interest in 95 acres.

What is our client's capital gains tax position on the 1998 transactions? If there is a gain, is holdover relief available, or can the gain arising on the disposals be rolled into the acquisition of the remaining two-thirds share acquired?

(Query T15,825) – Potash.

 

The process of unravelling the tenancy in common in 1998 would have involved a partition of the land as between the widow and the two brothers-in-law using the procedures provided for in section 7, Trusts of Land and Appointment of Trustees Act 1996.

The segregation of interests in this way reflects a disposal of the interests exchanged for a consideration, representing the value of the interest acquired. As the widow is connected to her brothers-in-law, the notional disposal proceeds are based on market value rather than the values agreed between the parties. However, it is assumed that for the purposes of the following computation that the values provided by 'Potash' are the relative prevailing market values.

The risk of perhaps substantial capital gains tax exposure on such partition exercises is mitigated by Extra-statutory Concession D26. Following the decision in Warrington v Brown and others [1989] STC 577, a partition in accordance with the underlying beneficial interests is not a disposal, and there is a view that the concession does no more than reflect the legal rights of the parties, in which case concessional treatment will not always be necessary. However, in the instant case it is thought preferable to rely on the concession.

The widow will need to claim operation of the concession; although not specifically provided for in the concession itself it is thought that the claim time limit is a period of six years following the end of the year of assessment in which the partition takes place.

In the widow's case the consideration received for relinquishing her interest in the total holding is less than the consideration given for the interest acquired; in these circumstances the concession affords full rollover relief into the cost of her acquisition of the 95 acres as follows:

Value of widow's interest in April 1990

 

(1/3 x £400,000)

 

£133,333

Consideration given (1/3 x £371,000)

£123,667

Consideration received (2/3 x £208,000)

£138,667

 

 

 

Cost of widow's part disposal

£

£

(138,667/(138,667 + 69,333))

 

 

x 133,333

 

88,888

Add indexation allowance

 

 

(assumed to April 1998)

 

 

30 per cent

 

26,666

 

 

115,554

 

 

 

Disposal proceeds

138,667

 

Less: rollover relief (restricted)

38,113

100,554

 

 

15,000

 

 

 

Cost of 95 acres acquired

 

 

Cost of 2/3 interest acquired

123,667

 

Less: rollover relief

38,113

85,554

 

 

 

Cost of remaining 1/3 interest

 

 

retained from April 1990

133,333

 

Less: part disposal

88,888

44,445

 

 

 

Total cost

 

£129,999

'Potash's' client has disposed of a one-third share in 143 acres of farmland, and a one-third share in the two cottages, to her two brothers-in-law, in exchange for their two-thirds share in the 95 acres of farmland that she now owns outright.

If the bargain is at arm's length, and section 17, Taxation of Chargeable Gains Act 1992 does not apply, the consideration she has received for the disposal of these interests is £138,666 (2/3rds of £208,000) whereas the value of what she has disposed of appears to be £123,666 (1/3rd of £(225,000+64,000+82,000). If section 17 does apply, the consideration received for the disposal is the market value of a two-thirds share in the assets disposed of, £123,666.

If the brothers-in-law were brothers of her deceased spouse (as opposed to the husbands of sisters who are still living), they cannot be connected persons following the death of her spouse (Vestey's Exors and Vestey v Commissioners of Inland Revenue 31 TC 1) and section 18, Taxation of Chargeable Gains Act 1992 cannot apply to introduce market value.

The base cost of the widow's share will be £133,333 (1/3rd of £(360,000 + 40,000)). Indexation from April 1990 to April 1998 (assuming the disposal took place after 31 March 1998) will be at a factor of 0.300. The part disposal formula is then applied to the total proceeds, according to whether the actual consideration applies or whether the arm's length principle requires substitution of a notional figure. However, it may be possible to contend that the two cottages and 143 acres should be treated as one asset in accordance with Revenue practice (see Capital Gains Manual at paragraph 71850). This would avoid the use of the part disposal formula. I find that Inspectors are more used to dealing with this method than the part disposal formula.

A modified form of rollover may be available following Extra-statutory Concession D26. Note, however, the concession refers to an exchange of joint interests in land which results in each joint owner becoming the sole owner of part of the land formerly owned jointly. 'Potash' has said that after the exchange the two brothers-in-law held property jointly rather than solely. – Taxplanet.

 

Extract from reply by 'Lane':

Of the 80 acres farmed by the partnership, only one-third is owned by the client. She is disposing of her one-third share in the acreage attributable to the brothers-in-law but she does not farm on their land.

Section 152, Taxation of Chargeable Gains Act 1992 would seem to offer a rollover opportunity, but only as regards the two-thirds of 80 acres acquired (value £116,772) and all the additional 15 acres (value £32,842). Unfortunately, the value obtained from disposal of the client's one-third interest in the other 143 acres is unavailable for section 152 relief, as the client does not farm there.

The cottages should have an appropriate agricultural character before section 152 could apply (see Anderton v Lamb [1981] STC 43).

Issue: 3812 / Categories:
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