When considering farm succession planning, most will focus on how they wish to pass on the assets of the business to the next generation upon death. However, lifetime gifting of assets is something that also falls under this umbrella term and can be a strategy worth exploring to help protect the future of the farm estate.
Trowers' associates Victoria Borrow and Holly Bryan highlight a few important considerations for agricultural landowners looking to gift assets and why you should act now.
The Capital Gains Tax conundrum
Capital Gains Tax (CGT) is usually charged where a person disposes of an asset and makes a profit (gain) that is capital in nature. The 'gain' is the difference between the value of the asset when you originally acquired it (e.g. purchase price) and the value of the asset upon disposal (e.g. sale price), less allowable deductions. One could be forgiven for thinking that CGT does not apply to gifts. Unfortunately, this is not the case.
Where you transfer an asset to another person at no charge, the market value will be substituted for the 'sale price' for the purposes of calculating the gain. Likewise, where an asset is transferred at an undervalue the difference between the amount received and the true market value will be considered a gift.
The rate of CGT applicable ranges from 10% - 28%, depending on the nature of the asset, the size of the gain and your taxable income.
Whilst the possibility of an immediate tax charge may seem prohibitive, this should not necessarily dissuade you from gifting property to the next generation if that is what works in the best interests of the farm estate. It should be noted that CGT is a lesser tax than Inheritance Tax (usually 40%) and there are ways in which CGT can be mitigated, as explained below.
Annual Exempt Amount – use it or lose it.
The Annual Exempt Amount (AEA) is the amount of gain an individual can make in each tax year free of tax. In his 2022 Autumn Budget, Chancellor Jeremy Hunt announced that the AEA is to be slashed from £12,300 to £6,000 from April 2023 and £3,000 from April 2024.
As a practical example what this means is: currently a married couple could gift a field to a child with a gain of £24,000 and pay no CGT, but after 6 April 2023, the same transaction could potentially result in a CGT bill of £1,200 - £2,400.
The message being, if you are thinking about gifting property, the time to act is now.
Reliefs
If the gain exceeds the AEA and gifting assets now is still the right option for you, there are ways in which we can help you plan ahead. Reliefs such as Principal Private Residence Relief and Hold-over Relief may provide an exemption from CGT altogether, a reduction in the amount payable, or a deferral of the tax to a later date.
When it comes to lifetime gifting of farm or agricultural land, Hold-over Relief can be a particularly useful tool for deferring the tax charge, especially given the increase in land prices over recent years. The effect of Hold-over Relief is that the chargeable gain is postponed until future disposal of the asset by the person who has received it, meaning the person gifting the land avoids a substantial tax liability where there are no cash proceeds available to pay it.
Whether a relief is available and which relief is appropriate will depend upon the type of asset, any previous relief claimed and the future intentions of the parties. In all instances the gain will need to be reported to HMRC and a claim submitted within the correct timeframe to avoid penalties.
Working in collaboration with your existing professional advisers, Trowers can help guide you through the process to best preserve the assets of the farm estate and achieve your succession aims.
Protecting gifts for your intended recipient
If you elect to make a lifetime gift, whether for tax purposes or otherwise, it is important to properly consider whether your gift is protected for the intended recipient. There are a number of circumstances in which your gift could fall into the legal ownership of an unintended person, such as an unmarried partner or spouse. This can be incredibly difficult, and stressful, to recover.
If, for example, you make a lump sum gift to your child and this gift is used to purchase a property held in the joint names of your child and their unmarried partner, your gift may inadvertently have been transferred into the joint names of both your child and their partner, resulting in the partner being entitled to half of it if their relationship breaks down, irrespective of the fact that the gift was made by you to your own child.
The same applies for property; where a property is transferred into the joint names of two individuals, the legal presumption is that they are each entitled to half of the equity in it (irrespective of the source of the equity) unless otherwise confirmed in a document such as a Declaration of Trust (which is explained further below). If the property is held as 'joint tenants', on the death of one owner, it will pass automatically to the other (irrespective of whether the deceased owner contributed most/all of the equity). Whilst it is possible to rebut a presumption of equal equity entitlement, the process for this can be lengthy and expensive. The process for attempting to undo a property passing automatically to a joint owner on death is even more complex.
All of these scenarios can be avoided by seeking specialist asset protection advice, and if necessary, putting in place the asset protection documents below:
Unmarried Couples
- Declaration of Trust: this document confirms the shares in which a property's owners hold its equity. The shares can be fixed to a gifted lump sum, or 'floating', to protect ongoing or additional contributions by one owner. Declarations of Trust are legally binding and enforceable at court and are effective asset protection tools.
- Cohabitation Agreement: A Cohabitation Agreement can not only include a binding Declaration of Trust as above, but also deal with various other issues and possibilities, including the management of household outgoings, protection in respect of bank accounts, and how the property should be dealt with on relationship breakdown. These documents are akin to Pre-Nuptial Agreements.
Married Couples
- Pre-Nuptial Agreement: in order to ring-fence assets between married couples, it will be necessary for them to enter into a Pre-Nuptial Agreement (if prior to marriage) or Post-Nuptial Agreement (if following marriage). These agreements confirm how assets are to be divided in the event the marriage or civil partnership breaks down.
The above documents should always be entered into prior to the lifetime gift being made, if possible, to ensure your gift is protected immediately and you can have peace of mind that it shall be secure for your intended recipient.
For any private wealth advice, whether relating to farm estates or any kind of personal and family assets, please do not hesitate to get in touch with Trower's legal experts.
