Under FRS102, investment property must be measured at fair value with differences flowing through Profit and Loss. With the July 2019 report on Inheritance Tax (IHT) by the Office of Tax Simplification (OTS) suggesting that the trading percentage is increased in line with Capital Gains Tax (CGT), i.e. from 50% to 80% (although this didn’t happen in Budget 2020), even more care must be taken when deciding exactly what is an investment property for tax. There should be no rushing into an accounts disclosure without thinking through the capital taxes position. Another point of interest is Rollover Relief.
The importance of Rollover Relief for farmers
With the reduction of the lifetime limit for Entrepreneurs’ Relief (ER) from £10 million to £1 million, Rollover Relief has become more important. Some might argue that with the property market brought to a standstill over the coronavirus pandemic, Rollover Relief is less possible to put in place as the property market is in “lockdown”. However, arguments for the Rollover Relief and deferred tax disclosures are still strong considerations. Firstly, there was a large amount of rollover in the corporate accounts that are currently being prepared by companies and their advisors. Secondly, Rollover Relief is very viable on farmland and woodland where social distancing can be achieved. Many farm sales are still going ahead despite the residential property problems.
Where firms of accountants have a distinct role between accounts and tax, the accounts team should be linking with the tax team to see what the position is regarding deferred tax, so that disclosures in statutory accounts are full and complete.
The rate of CGT will be different between a residential property at 28% and other non-residential property at 20% (or 10% with ER). The base cost of the property will have to be ascertained in order to calculate the CGT. Thought must also be given to the new residential CGT returns from 6 April 2020 as the date has now passed where all residential sales will involve the new returns.
Under FRS 102, the basic principle for recognition is that a deferred tax asset or liability is recognized in respect of all timing differences and never recognised in respect of permanent differences. When Rollover Relief is claimed, deferred tax must be provided on the amount of the gain that is rolled over into the cost of the replacement asset. The deferred tax on the potential for directors not being able to find the right rollover property must also be considered in accounts disclosure terms, and will have to be provided for, otherwise the balance sheet would be overstated. On the subject of deferred tax, new buildings are entitled to Structures and Buildings Allowance and that should also be considered with all properties used in the business.
Under the Rollover provisions, the time limit is 36 months after exchange. There could be some farming entities who are relying on Rollover by a certain date, only to find many land agents on “furlough”, solicitors working from home and time limits to purchase farmland very tight.
Supplied by Julie Butler F.C.A – Joint Managing Partner, and Andy Case FCCA – Partner, Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH. Tel: 01962 735544. Email: firstname.lastname@example.org, email@example.com, Website: www.butler-co.co.uk
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, Butler’s Equine Tax Planning (2nd Edition) (Law Brief Publishing) and Stanley: Taxation of Farmers and Landowners (LexisNexis), and editor of Farm Tax Brief.
8 April 2020