Article featured in the Farmers Weekly Business Clinic on 26 August 2017, please click here to view the full article.
Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.
Here, Lucie Hammond of accountant Hazlewoods advises on capital gains tax (CGT) liability on a house sale when the owner is in a care home.
Q My parents were farmers all their lives. In the late 1980s, they sold the farmhouse and farm buildings (for conversion to a dwelling) but kept all the land.
They then moved to another house with 8ha of land which belonged to my mother.
To be able to sell the farm house on the open market they moved the agricultural tie to the house owned by my mother.
My father died in 2005 and left his land with no house or buildings to my sons. My mother has been in a care home for some years and my brother and I now have to act on her behalf.
She is running out of funds to pay care home fees so we need to sell the house to raise some money. At this point, we do not want to sell the 8ha of land.
If and when we manage to sell the house with or without the tie, will we have to pay CGT as we will not be buying another property? The money will be used to pay care home fees for as long as needed.
A There are a number of factors to be taken into account in establishing the CGT position relating to your mother’s house.
Any gain is based on the difference between the sale proceeds less the acquisition cost, cost of improvement and cost of sale.
The gain is then reduced by any exemptions or reliefs due.
Generally, where during the entire period of ownership a house is occupied by the owner as their only or main residence then provided the garden and grounds of the house are within half a hectare, any capital gain on disposal is exempt from CGT.
Principal private residence
This is known as the principal private residence relief (PPR) exemption.
If the garden and grounds exceed half a hectare then the size and character of the house is taken into account in establishing if the additional area is required for the reasonable enjoyment of the house and can be included in the PPR exemption.
If the additional area does not qualify then a proportion of the gain may be taxable.
The period of ownership begins on the date your mother first acquired the house, or 31 March 1982 if later, and ends when the house is sold.
Any gain arising during this period is potentially subject to CGT, but the total gain may be reduced using the PPR exemption.
Assuming when the farmhouse was sold in the late 1980s PPR exemption was claimed, then any period of ownership your mother had of the current house between 31 March 1982 and the date your mother and father moved into it would not qualify for the PPR exemption and may be subject to CGT.
Where a property qualifies for PPR, certain periods of absence from the property can increase the gain which qualifies.
The final 18 months of ownership always qualify for relief, regardless of how you use the property in that time.
As your mother is resident in a care home this final period is increased to 36 months, provided she does not have any other relevant right in relation to a private residence.
Certain other periods of absence may also qualify for relief where your mother lived in the house both before and after these periods of absence.
As the house has not always been your mother’s main residence, the gain is split between the exempt part, being the period of actual occupation and any deemed occupation and the taxable remaining period of ownership.
You have not indicated if your mother let the house to a third party. If it was let a further relief may be due in respect of the let period.
This is subject to a maximum amount of the lower of, the PPR already calculated, £40,000 or the chargeable gain relating to the let period.
Unless your mother has other disposals which are subject to CGT, she would have her annual CGT exemption (£11,300 for the current tax year) to reduce the amount of gain on which CGT is payable.
Any remaining gain after reliefs and exemptions would be subject to CGT at 18% or 28% depending on the level of taxable income for the year.
Where there is a disposal of land used for agricultural purposes or other qualifying business assets, then in certain circumstances it is possible to claim CGT rollover relief where the proceeds are used to purchase further agricultural land or business assets.
Unfortunately, rollover relief is not available on residential dwellings.