Ask an expert: We look at ways to reduce the capital gains tax due when two parties want to trade their properties
I want to sell my house and buy a plot of land to start my own farm. I have found a plot and the owner has agreed to sell but she discovered that by dividing her land and selling a portion to me she would have to pay capital gains tax. This promptly stopped the sale.
She intended to use the money to buy a small house, so could we just swap properties? Or, as her property is currently used for breeding horses and she is downsizing, could she sell it to me as a business?
We’re assuming that the vendor wishes to sell her home and the land, but is also open to selling each plot separately.
Frank Nash, a tax partner at accountancy firm Blick Rothenberg, said separating the land and the house will probably not result in a capital-gains tax saving.
Firstly, there is an exemption from capital gains tax on the sale of an individual’s main home.
This exemption extends to land of up to half-a-hectare which is occupied and enjoyed with the home as its “garden or grounds”.
“This is about two-thirds the size of a football pitch,” Mr Nash said. “If the garden and grounds cover a larger area, HMRC will often extend the tax exemption provided a home owner can show that the larger area is required for the reasonable enjoyment of the particular family home.
“This could cover, for example, the proceeds received for the sale of orchards, pony paddocks or tennis courts that are adjacent to the house. This is an opportunity to argue up the tax-free area of any house that has large or extended grounds.”
CGT: ‘I bought a house for my son. Can I claim relief?’
‘I stand to inherit a share of my father’s house. What if his widow sells it?’
Unfortunately, HMRC does not consider that land used in a business should be exempt from capital gains tax. “It is, of course, very difficult for a home owner to argue this point because if land is used for a business, it cannot usually be said to be enjoyed as part of the home,” he said.
“You may therefore need to find out whether the horses are being bred as a hobby for the family to ride, or are being bred for sale.
“Any land sold that is being used for a commercial business, such as a stud farm, will be liable to capital gains tax at 28pc on the difference between the sale proceeds and the original cost.”
If the vendor is retiring from the horse-breeding activity and selling the property at the same time, they may be able to reduce the tax they pay.
A special relief called “entrepreneurs’ relief” will reduce the rate of tax from 28pc to 10pc.
“To obtain this relief, the horse-breeding activity must have been a commercial business which means it must have been making a profit year on year,” Mr Nash said. “If that is the case, a reduced tax rate of 10pc may be acceptable to the vendor. You will need to explore this opportunity with her.
“You could of course take over the business when the vendor retires. Unfortunately, swapping houses and land will not achieve anything.”
Mr Nash added: “A disposal for tax purposes is still made by the vendor, so exploring the exemptions set out above will be important if the vendor is to be persuaded to sell.”