Occasionally in a family farming partnership, there may come a time when the existing partnership structure is no longer deemed appropriate to accommodate the changing dynamics of the family. For example, siblings may want to farm independently or provide an opportunity for their children to join the business. This can create a scenario where the family farm(s) may need to be divided and the original partnership dissolved.
In other instances, the partnership may continue but the landholdings are rearranged simply to rationalise the ownership of the land and to make it easier to deal with in the future.
The rearrangement of landholdings may be facilitated by the “exchange of joint interests” legislation, details of which includes the following:
- An exchange of joint interests is chargeable to Capital Gains Tax (CGT) – even when no money changes hands.
- However, a form of rollover relief is available in certain circumstances to facilitate rearrangements of landholdings (TCGA 1992/s248A).
- The amount of relief given will depend on whether or not the interests exchanged are of equal value.
- Where the value of the deemed consideration for the disposal of a relinquished interest is equal to or less than the market value of that interest – there is deemed to be no capital gain or loss.
- Where the value of the deemed consideration for the disposal of a relinquished interest exceeds the market value of that interest – CGT is payable on the excess value.
For this purpose, the deemed consideration for the disposal is taken to be the market value of the interest acquired.
Example
A + B jointly owns two parcels of land – Parcel 1 valued at £400 and Parcel 2 at £600.
They exchange their joint interests in both parcels. ‘A’ receives Parcel 1 and ‘B’ receives Parcel 2.
‘A’ has relinquished his half interest in Parcel 2 for a consideration of £200 (the value of a half interest acquired in Parcel 1). This is less than the market value of the relinquished interest of £300 therefore deemed to be no gain no loss.
‘B’ has relinquished his half interest in Parcel 1 for a consideration of £300 (the value of a half interest acquired in Parcel 2). This exceeds the market value of the relinquished interest of £200 therefore CGT is chargeable on the excess – £100.
- Exchange of Joint Interests legislation excludes dwellings occupied by joint owners as private residences (excluded land – TCGA 1992/s248C).
- Separate relief can be granted for the exchange of joint interests in private residences (TCGA 1992/s248E).
- There should be no CGT on exchange of joint interests in private residences even if the values are unequal.
However, the value of land exchanged, excluding private residences, will need to be equal to avoid a CGT charge:
The tax rules surrounding partnership dissolutions and exchange of joint interests can be very complicated and specialist advice should be taken. If you would like any further information regarding the above, please do not hesitate to contact a member of our agricultural team.
