Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query on the capital gains tax (CGT) and inheritance tax (IHT) implications of farmland passed from a sole trader father to his adult son during mediation.
The tax query
‘My client is a sole trader farmer. One of his adult sons has been actively assisting his father, on a full time basis, essentially from his teenage years right through to the present time, when he is middle aged. The son has worked for very low recompense, save for an assurance that one day, he would become the owner of the farming business.
In recent years, this father son relationship has soured, due to (among other things) the father’s reluctance to ‘sign over’ any of the farmlands to his son. In consequence, the son took a proprietary estoppel law case and eventually the case was resolved outside the High Court, on the day of the scheduled hearing, with the son being awarded a substantial portion of the farmland involved. The written agreement resolving the matter was made the subject of an order by the High Court.
First, am I right to think that the capital gains tax implications are:
- That this father has made a relating disposal for CGT purposes, but there are no relating proceeds for CGT purposes?
- While relevant CGT base costs and legal costs, etc can be deducted per the relating CGT computation pertaining to the father, this will result in ‘clogged’ CGT losses, with respect to the father?
Second, with respect to the property awarded by the High Court to the son in the instant case and, regarding prospective IHT returns for the father (who is quite elderly), even if the father dies within seven years of the date of the High Court order, because of the provisions of IHTA 1984, s 5 am I right to think that zero attributable value will apply in such IHT returns, simply because there is no relating beneficial ownership applying to the father consequent upon resolution of the relating legal proceedings? And, with respect to IHTA 1984, s 102 regarding GWROB, that section cannot apply because there was no gift?
What do readers think?’ Query 20,451 – Matey.
Terry Jordan’s reply: The father will have a CGT liability
‘Matey’s client has been obliged to transfer a substantial portion of farmland to his son who made a proprietary estoppel claim and Matey is concerned with the capital taxes treatment of the transfer. For capital gains tax purposes, the father and son are connected persons so TCGA 1992, s 18 is in point and s 17 deems market value to apply. On the basis that the father has run his sole trader business for some time, a gain is likely to have arisen on his disposal and the father will have a CGT liability. Holdover relief would be available but that would require the son to be a party to the election. (Matey is correct in that if, exceptionally, a loss arose on the disposal, it would be ‘clogged’ in accordance with s 17(3) and available only on another disposal from father to son that generated a gain.)
Turning to inheritance tax, Matey refers to IHTA 1984, s 5. That section defines what constitutes a person’s estate for IHT purposes. The farmland transferred would obviously not form part of the father’s estate on death unless the gifts with reservation of benefit (GROB) provisions in FA 1986 applied. The key question is whether an IHT charge would arise if the father died within seven years of the transfer.
On the face of it, the father is making a transfer of value within s 3 which, as an outright gift to another individual, would be a potentially exempt transfer under s 3A with a seven-year tail. However, s 10 provides that a disposition is not a transfer of value if it was not intended to confer any gratuitous benefit on any person and, in the case of connected persons, that it was such as might be expected to be made between persons not connected with each other.
If, exceptionally, s 10 is not in point reference might usefully be made to Nelson Dance Family Settlement v CRC [2008] STC (SCD) 792, affirmed [2009] STC 802, as agricultural property relief (APR) is limited to the agricultural value of the land and if there is any hope or development value it is desirable to qualify for business property relief (BPR) as well. In that case, it was held that a lifetime transfer of land to trust did benefit from BPR as the value transferred was attributable to the farming business. (For completeness, I understand that the transferor died within seven years and the clawback conditions in s 113A(3)(b) were not satisfied.)
Finally, on the GWROB point, I agree that the father is not making a gift.’
The full article was published in Taxation magazine (issue 4969) and is available to subscribers here on the Taxation website.
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