Tax lawyer and writer Tax Notes
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Any Answers answered: Entrepreneurs' relief for a converted barn

2nd Nov 2015
Tax lawyer and writer Tax Notes
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A stumped AccountingWEB member turned to Any Answers hoping the AccountingWEB community could answer whether entrepreneurs’ relief is available for a converted barn. The question is of interest, as it is taken from a real life exampleand illustrates a number of principles governing the operation of entrepreneurs’ relief when the business is conducted by a sole trader.

Entrepreneurs' relief is a capital gains tax relief designed to encourage individuals to set up and grow their own business. If the conditions are satisfied, capital gains are taxed at the reduced rate of 10%, instead of the higher 18/28% rates.

Although the question relates to a farming business, the same principles apply equally to any other type of trading venture. What is the position when a longstanding trade asset is taken out of the business? Does it lose the benefit of the 10% rate entirely, or can the gain be apportioned between the business and non-business periods? The latter would be an ideal solution, as a substantial part of the gain would still benefit from the reduced rates.

I'm a small scale farmer who has obtained planning permission to convert a barn to residential.

If I sell the unconverted barn with planning permission I think I should be able to claim entrepreneurs allowance as I would also close the farming business at the same time as the sale.

My question is - If I convert the barn, live in it myself for a few years whilst carrying on the farming business, but then sell the converted barn at the same time closing the farming business, can I claim entrepreneurs allowance on the capital gain from the barn even though I have spent money renovating/converting to residential ?”

Thank you in advance,

Farmer Giles (not his real name).

Bad news!

The short answer is that it is very unlikely that our farmer friend will get his entrepreneurs’ relief. The relief requires that the asset to be sold is still in business use at the relevant point in time – either at the point of sale, or when the farmer stops trading. This will certainly not be the case if he converts the barn before he stops trading. Even without the barn conversion, the fact that he has planning permission may give rise to difficulties.

We shall now take a look at the tax legislation to see why this is the case. We assume that the farmer is a sole trader, and has owned the business for many years.

What are the rules for asset sales?

The general rule is that an asset cannot qualify for the relief if it is sold “in isolation.” The 10% rate only applies if either:

  • The whole business is sold; or;

  • The asset is sold as part of collection of assets constituting an identifiable part of the business.

What is an identifiable part of the business? It is a part that can be spun off out of the whole and be run as an independent enterprise. For example, suppose the barn is where the cows go to sleep at night – it could be sold as part of a separate dairy business while the farmer retained the other assets of his business, such as the sheep, the pigs and the goats.

(TCGA 1992 ss 169I(2)(a), 169I(3).

However, the rule that forbids isolated asset sales doesn’t apply when the business stops trading.

When a business is wound up, the debts are settled and the assets are sold off. Any gains would have benefited from entrepreneurs’ relief had a suitable buyer been found while the business was still live and kicking. In these circumstances there is a three year grace period during which the business assets can be sold off and be taxed at the reduced 10% rates.

TCGA 1992, s 169I(2)(b), 169(4).

It is clearly this latter scenario that the farmer has in mind – he talks about “closing the business” rather than selling it. It is hard to see how the barn would qualify for the relief if it were included in a business sale. For the words of the legislation require:

“a disposal of the whole or part of a business”

which in turn implies that the assets disposed of must still be in business use at the point of sale. But it is arguable that the barn has actually been taken out of the business. This will certainly be the case if construction work has commenced. Even without any work being done on the barn, the fact that the farmer has obtained planning permission indicates that it is no longer in business use.

So the farmer is on the right lines. If entrepreneurs’ relief is to apply to the barn at all, it must come as a result of “closing the business.”

Closing the business – timing issues

Our farmer friend thinks that he can claim the relief if he sells the barn at the same time as closing the business. It is important however to get the order right:

  • Close the business first;

  • Then – and only then – sell off the barn.

This is borne out by the words of the legislation which states that the date that the business stops trading must be:

within the period of three years ending with the date of disposal.” 

TCGA 1992 s 169I(4)(b).

But is the barn in business use?

Once again, it is the business use condition that is likely to deny our friend the 10% rate. For the relief only applies to:

“a disposal of…one or more assets in use at the time at which a business ceases to be carried on, for the purposes of the business.” [emphasis added]

TCGA 1992 ss 169I(2)(b).

In other words, the barn has to be still in business use at the time that he stops trading. This will certainly not be the case if he has already converted it and is living in the property. Even if he delays work until after he stops trading, the fact that he has planning permission may still cause difficulties. How can the barn be part of the business if he’s planning to convert it to residential use?

But is planning permission really fatal?

We are told that the farmer has yet to convert the barn – is it too late to turn it back into business use? For example, could he continue to let it out to the odd cow, or use it for storing hay? Once he stops trading, he can start the necessary building work; for there is no prohibition on what he does with the assets after the business comes to an end.

In tax terms this would probably work. But for practical purposes it really isn’t satisfactory at all.

Is it realistic to expect Farmer Giles to wait until he stops trading? At some point his planning permission is likely to expire – reapplying for permission may take more time and expense. And even if he can start work after the business closes, he has three years to sell the building – how much time does that leave for him to actually live in the property?

Why can’t the gain on the barn be apportioned for business use?

Because the rules don’t allow it. And this is probably one of the big disadvantages of entrepreneurs’ relief. An asset such as a barn or a warehouse may have been used in the business for many years, but once it’s taken out, it’s taken out for good – the 10% rate can no longer apply.

In an ideal world one would be able to sell the building at any time and claim credit for the period for which it was used as a barn. A large part of the gain would be taxed at the 10% rate, with the remainder – a relatively small amount – taxed at the higher 18/28% rates.

And this may in fact still be possible in certain circumstances. How and why this can be the case is a topic that we shall explore in a subsequent article.

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