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We act for a family partnership (Mr and Mrs X and their two sons) that constructed a farmhouse in 1990 for Mr and Mrs X to live in. The cost of the work was £70,000, and agricultural buildings allowance of one-third of £70,000 has since been claimed.
In 1997, Mr and Mrs X gifted their half share in the property to their sons (one of whom began to live there) and recently they have had the agricultural tie lifted and want to sell the property on the open market for £350,000.
Our specific queries are as follows:
We act for a family partnership (Mr and Mrs X and their two sons) that constructed a farmhouse in 1990 for Mr and Mrs X to live in. The cost of the work was £70,000, and agricultural buildings allowance of one-third of £70,000 has since been claimed.
In 1997, Mr and Mrs X gifted their half share in the property to their sons (one of whom began to live there) and recently they have had the agricultural tie lifted and want to sell the property on the open market for £350,000.
Our specific queries are as follows:
* In 1997 (subject to there being a taxable gain), was Mr and Mrs X's gift covered by principal private residence relief, or does the fact that agricultural buildings allowances have been claimed mean that one-third of any gain is subject to holdover relief?
* On the subsequent intended disposal there will obviously be a time apportioned principal private residence claim for one of the sons, but presumably both will be entitled to business asset taper relief, particularly the son who has not lived there.
Readers' comments would be appreciated.
(Query T16,105) - Sonny.
Section 369(3), Capital Allowances Act 2001 allows a claim for agricultural building allowances in relation to one third of the expenditure on a farmhouse except where the 'accommodation and amenities of the farmhouse' are disproportionate to 'the nature and extent of the farm', in which case there is to be substituted such part of the expenditure as is 'just and reasonable'.
When an agricultural building is disposed of, there is no clawback of these allowances unless the transferor and the transferee elect (section 381, Capital Allowances Act 2001).
The capital gains tax relief available to an individual on the disposal of his private residence (section 222, Taxation of Chargeable Gains Act 1992) applies to 'a dwelling-house or part of a dwelling-house, which is, or has at any time in his period of ownership been, his only or main residence' (section 222(1)(a)). Section 224(1), Taxation of Chargeable Gains Act 1992 restricts the private residence relief at section 222 if any part of a dwelling-house has been used exclusively for business purposes. But there is no statutory guidance in the Act to assist in determining what part of a farmhouse is regarded as used for business purposes. If no part of the farmhouse had been used exclusively for business purposes, there would have been no need to restrict a claim for private residence relief to take account of partial or occasional business use of rooms in the farmhouse, when the parents disposed of their half share in the farmhouse to the sons in 1997. The Revenue accepts this point and it is confirmed in its guidance in the Capital Gains Tax Manual at paragraph CG64663.
If part of the residence had been used exclusively for business purposes, a proportionate part of the gain would not qualify for private residence relief following section 224. That part of the gain could be held over, by virtue of section 162 of, and Schedule 7(1) to, the Taxation of Chargeable Gains Act 1992.
When the sons dispose of the property, they own a quarter share each with a base cost from 1990 and a quarter share each with a base cost from the date of the parents' gift in 1997.
As 'Sonny' suggests, the son who occupied the property as his main residence should be eligible for a measure of relief under section 222 in relation to his half share of the gain. The remainder of his gain and the other son's gain will be eligible for taper relief at either the business asset or non-business asset rate.
Business asset taper relief is due where an asset is used 'wholly or partly' for the purposes of a trade carried on by an individual or by a partnership (see paragraph 5(2) of Schedule A1 to the Taxation of Chargeable Gains Act 1992). There are apportionment provisions at paragraph 7 of Schedule A1. These apply where an asset has at the same time been used for both business and non-qualifying purposes. The paragraph requires an apportionment on a 'just and reasonable' basis. It is suggested that this section would operate to deny taper relief at the business asset rate in relation to the majority of the gain if no parts of the farmhouse have been used exclusively for business purposes. - Hayloft.
'Sonny' needs to treat the capital gains tax position of the four partners as separate situations. However, those of Mr and Mrs X would be identical; therefore they could be considered jointly when identifying the appropriate tax legislation.
Mr and Mrs X. In 1997 they sold a building that had always been their principal private residence. The only factor that could have reduced their capital gains tax exemption would be if part of the building had been used exclusively for business purposes (section 224, Taxation of Chargeable Gains Act 1992). To check this, one would need to refer to the way business expenses had been claimed over the years. If any part of the building had been treated as exclusively for business purposes, then a restriction of the principal private residence relief would apply, normally based on an area percentage. However, if (as is the usual position) the business claim had been limited to a fair and reasonable proportion of the total expenses and there had always been an element of personal use of the whole of the premises, the principal private residence exemption would not have been jeopardised.
Therefore, there would have been no tax return reporting responsibility, nor tax liability in respect of the transfer of the farmhouse to the sons of Mr and Mrs X in 1997, unless exclusive use for business purposes of any part of the farmhouse had previously taken place.
Son 1. His capital gain calculation will need to be based on a time apportionment division between principal private residence exemption and use of a business asset. The calculation will have a base cost of:
(a) Son 1's 25 per cent share of the £70,000 construction cost in 1990, enhanced by indexation to April 1998; plus:
(b) Son 1's 50 per cent share of the value at the date of the transfer in 1997 (i.e. not original cost) representing his parents' joint 50 per cent share of the farmhouse - mathematically, of course, being 25 per cent of its then value. The estimation of its value at that date would have due regard to the fact it was subject to an agricultural tie. The value would be increased by indexation calculated to April 1998.
Once a capital gain has been established, it should be apportioned for the time it had been used as the son's own residence, compared with his ownership time since 1990. That element would be exempted from a capital gains tax charge. It is assumed from 'Sonny's' comments that Son 1 will live in the farmhouse until the date of the sale, therefore the notional principal private residence added for the final three years of ownership would not apply (section 223(1), Taxation of Chargeable Gains Act 1992). It has also been assumed that the farmhouse will not be let, so no element of relief under section 223(4), Taxation of Chargeable Gains Act 1992 will be applicable.
Next, the remaining proportion needs to be considered for 75 per cent taper relief for a business asset. This is likely to be allowed as applicable for one-third of the total.
Finally, the two-thirds of the chargeable gain that does not qualify as a business asset will have an allowance for non-business asset taper relief. As the son had owned his share of the farmhouse prior to 5 April 1998, he would be entitled to his 'extra' year. If the sale were to take place before 5 April 2003, this would mean a 15 per cent reduction on the non-business asset gain.
The resultant gain could then be reduced further by his annual capital gains tax exemption if available, for 2002-03 being £7,700.
Son 2. His base cost calculations will be the same as for Son 1. Of course, he has no principal private residence relief. His taper relief then follows as calculated for Son 1, being 75 per cent for the one-third business asset proportion and (if a sale takes place prior to 5 April 2003) 15 per cent of the two-thirds non-business asset proportion. His annual exemption can be applied after the taper relief.
It seems that an imminent sale of the farmhouse is required, which would preclude tax planning opportunities. If this were not essential and if family circumstances were appropriate, Son 1 and Son 2 might exchange their dwellings, ideally for a period of three years. The effect would be to extend to Son 1 the section 223(1) relief for the final three years of ownership and to Son 2 an element of principal private residence relief.
'Sonny' refers to the potential interaction of the agricultural buildings allowance claims and capital gains tax. As described above, calculation of the latter is not affected by any claim for the former. However, regard should be had for agricultural buildings allowances when a property, which is subject to claims, is disposed of. It will affect the income tax liability of both the vendor and the purchaser. If no other election is made, when the sons sell the farmhouse they will calculate their agricultural buildings allowances for that year on a proportional basis to the date they sell. Alternatively, an election could be made jointly between the vendors and the purchaser under section 382, Capital Allowances Act 2001. In the circumstances described, it is unlikely to be beneficial to 'Sonny's' clients. The effect would be that no writing down allowance would be obtained by the vendors in their final year of ownership. Instead, the proceeds would be compared with the tax written down value of the relevant proportion of the farmhouse and an appropriate balancing charge or allowance would be applied. - AM.
