By Keith Johnston, tax director, Armstrong Watson
It has been said many times that planning ahead is necessary to prevent unwanted tax liabilities arising, and this is especially true when it comes to gifting land, particularly if there is a change of use.
The examples below show four common ways gifting land may be necessary and highlight the benefits of taking early advice to help avoid an unexpected tax burden.
A family member wishes to obtain planning permission to convert a barn on a farm, which is used for storing crop and machinery, into a house to live in.
- If the barn is gifted while still in agricultural use, Capital Gains Tax (CGT) can normally be deferred by making a holdover election. It will then continue to be exempt from CGT as long as it is lived in by the new owner.
- For Inheritance Tax (IHT) purposes, a gift before planning permission will be beneficial, as the barn will have a lower value than if gifted later.
A piece of land is owned by parents, who have been approached by a developer wishing to create a solar farm.
- As with the barn, a gift to the younger generation while the land is in agricultural use is likely to be beneficial.
- The solar farm will bring in a significant annual rent, and Income Tax on this needs careful thought. Splitting ownership across several family members can reduce the overall tax bill, and the use of a trust for grandchildren should also be considered.
Buildings on a farm are suitable for use as storage units, and planning permission is to be applied for.
- Again, a gift while the buildings are in agricultural use may be beneficial.
- For IHT purposes, the buildings will no longer be in agricultural use, so may be subject to tax.
- It may still be possible to obtain Business Property Relief on the buildings so that there is no IHT liability, but this needs careful planning.
An area of agricultural land and traditional farm buildings have been owned for many years, and subject to a farm tenancy to a third party. This tenant has just given notice that he will retire in 2026. Some of the land may have future development potential.
- The CGT position on a future sale of the development land can be improved if it is actively farmed from 2026 rather than being rented to a new tenant.
- The non-agricultural value of the development land may create an IHT liability, so an early gift is likely to be beneficial. A holdover election can be made as long as agricultural land has been owned for at least seven years.
If you are considering gifting land that you own, and there is going to be a change of use, it is important to plan carefully, give yourself plenty of time to make arrangements and to consider your tax position.
For more information and advice, please call 01768 222030 or email help@armstrongwatson.co.uk
