Readers Forum - Person or partnership?

Person or partnership?

We act for several tenant farmers who are currently negotiating to purchase their farms. Traditionally, the tenancy has been in the name of one person, although the business may have been carried on in partnership. Our queries are as follows.

• Is there a disposal on the surrender of the tenancy and, if so, by whom?
• If the answer to the first question is in the affirmative, is a rollover relief claim required?
• Can the tenant request to take over the unused agricultural buildings allowance of the landlord?

We should be grateful for readers' advice on these points.
Query T16,633                                                 — Tenant.

Tenant does not make it clear what type of agricultural tenancy is held by the individual partner. However, it is likely in view of the fact that the farm is farmed by a partnership, but the tenancy is held by an individual partner, that the tenancy is an Agricultural Holdings Act tenancy that pre-dates the introduction of farm business tenancies on 1 September 1995, or is a succession tenancy to such a tenancy granted after 31 August 1995. It is also likely that this is a partnership based in England rather than in Scotland because of these facts.
On that basis there is a disposal of the tenancy by the tenant-partner if it is surrendered to the members of the partnership (which may include the tenant-partner) following the acquisition of the encumbered reversion. Such a disposal will not be at arm's length and the market value of the tenancy at the date of surrender will be required to calculate the capital gains. The valuation of an Agricultural Holdings Act tenancy has been the subject of some litigation. Walton v CIR [1996] STC 68 (which although an inheritance tax case is pertinent to the valuation of a tenancy as a separately identifiable asset for capital gains tax purposes) is the leading case and suggests that there are two distinct methods of valuation that should be adopted dependent upon whether the circumstantial evidence at the date of valuation indicates that the landlord and tenant would act in concert to release the vacant possession premium value of the land.
First, where there is such circumstantial evidence, a (higher) method of valuation is adopted that is based upon the assumption that the vacant possession premium (i.e. the difference between vacant and tenanted value of the freehold) would be shared between landlord and tenant. This calls for a close examination of the surrounding facts, but in practice results in a valuation close to 25% of the vacant value of the freehold being ascribed to the tenancy.
Secondly, where there is no such circumstantial evidence a (lower) method of valuation is adopted that is based upon the aggregation of two capitalised rental differences: between the actual rent paid and the anticipated arbitration rent up to the date of next arbitration; and between the arbitration rent and a tender rent up to the date of when a hypothetical incoming tenant could expect his rent to be first reduced by arbitration.
Consequently, the higher method of valuation will be applied at the date of surrender, whereas the tenant-partner will either have no capital gains tax base cost (because the tenancy was granted after 31 March 1982) or an insignificant base cost based upon the lower method of valuation applied at 31 March 1982.
Whether rollover relief is available in these circumstances is a very difficult point — though it should be noted that as the tenancy is a business asset prior to its surrender a claim for holdover relief (under TCGA 1992, s 165) would always be available. The difficulty for roll-over relief arises following the case of Watton v Tippett [1997] STC 893 as HMRC's application of ESC D25 is now curtailed. In the HMRC instructions at Capital Gains Manual, paragraph CG60431, it is made clear that you cannot apply ESC 25 to gain rollover relief for the cost of acquisition in a further interest in that asset from which the gains are to be rolled-over. In practice, HMRC permit rollover relief if a premium is paid for the grant of a new farm business tenancy (though normally this is of limited value as the new farm business tenancy will be a depreciating asset subject to the rules in TCGA 1992, s 154).
With holdover relief the CGT aspects may not be a practical problem; of more concern might be the inheritance tax implications. The surrender of the tenancy is a transfer of value (see Baird v CIR [1991] 1 EGLR 201). If the tenant-partner subsequently dies within seven years, it should be noted that agricultural property relief will not apply to this transfer of value because the condition for that relief at IHTA 1984, s 124A(3)(a) will not be satisfied, i.e., the original property (being the tenancy) will not be held by the transferees following surrender as it will have merged with the freehold.
The agricultural buildings allowances due to the seller of the freehold reversion will pass to the purchasers subject to two exceptions. First, if the allowances relate to a building that has not yet been brought into use, CAA 2001, s 370 comes into play and the purchasers will base future allowances on the lower of the cost of construction or the price paid for the unused building (on a just and reasonable apportionment). Secondly, if the seller and the buyers elect (under CAA 2001, s 381), a balancing event may operate — though this rarely happens in practice because if the seller wants to generate a balancing allowance the buyers' allowances will be correspondingly reduced and if the buyers want a higher expenditure figure then there will be a balancing charge on the seller. Allowances due to the tenant-partner on his expenditure pass to the freeholders when the tenancy is surrendered (CAA 2001, s 367(2)) unless a new tenancy is immediately granted to the tenant-partner (CAA 2001, s 368(2)) or to other persons who pay any sum in respect of the qualifying expenditure (CAA 2001, s 368(3)).                                 

Issue: 4014 / Categories: