The tax payers Mr and Mrs Bell purchased a 667 acre farm in 1994 and formed a partnership. The couple were granted outline planning permission in 2008 (detailed permission in 2010) to build a detached dwelling that was previously used as sheep pens, this was later named Chapel Grange. The whole farm was sold and Mr and Mrs Bell claimed Chapel Grange was a qualifying asset for capital gains tax roll-over relief on the basis that it was a disposal of a farm worker\u2019s cottage, used by their son who worked on the farm.<\/p>\n
HMRC decided that the partnership return to 31st December 2016 should be amended and further tax due by the partners totalling \u00a352,426.92.<\/p>\n
HMRC agreed farmland and agricultural buildings would have been a qualifying asset up until the point that planning permission was granted. HMRC argued that the granting of planning permission and construction of the property clearly changed the nature of the asset.<\/p>\n
The taxpayers claimed Chapel Grange was transferred to their son via a declaration of trust prior to construction. The documentation to support this transfer was not produced. The funding for the build was shown as a loan to the son in the partnership accounts. The son built the house to his specification and completed a VAT self build claim in his personal name. The building warranty was granted to the son and his wife<\/p>\n
Chapel Grange was marketed to include 6.5 acres and planning for a double garage. The farm including Chapel Grange was also marketed separately. In the end, the entire farm including Chapel Grange was sold on one title for \u00a34,174,500.<\/p>\n
The capital gain on the sale of Chapel Grange of \u00a3225,146 was not in dispute.<\/p>\n
Mr and Mrs Bell argued it was \u201cessential\u201d for the property to be constructed because it would be necessary to have good housing to attract a manager if circumstances in the future changed. HMRC did not agree that the construction of Chapel Grange was essential. The Judge did not agree it was \u201cessential\u201d and said there was no evidence to support this assumption.<\/p>\n
The tribunal found that Chapel Grange was not a qualifying business asset and as such business asset roll-over relief should not be applied. The decision was made that the asset ceased to qualify on the earliest of: detailed planning permission being granted, demolition or construction.<\/p>\n
In my opinion this case is significant, due to the decision of the business asset ceasing to exist on the date the detailed planning permission was granted (as construction can often be some years later).\u00a0 To me, it appears the tax liability could have been mitigated by a transfer of the land to the son prior to planning and as such Chapel Grange was then the son\u2019s principle private residence and no tax liability would be due on the disposal. However, there may have been other considerations unknown to us as to why that transfer did not occur.<\/p>\n
If you are considering applying for planning permission then please consider any tax implications prior to submission. It is also important you keep evidence of the start date of demolition\/construction.<\/p>\n