With development opportunities increasing across the region, the number of farmers and landowners being approached by interested parties continues to rise. Ranging from smaller, bespoke residential developments to larger schemes involving both residential and commercial buildings, each transaction is different.
Similarly, when considering the tax implications of a potential sale of development land, there is no one size fits all solution. Factors such as the current ownership of the land, how the disposal will be structured and the aims for the realised proceeds all need to be considered when devising a tax strategy.
There is however one constant. It is vital that professional, tailored tax advice is obtained at the earliest opportunity to ensure that the sale can be carried out in as tax efficient a way as possible. A normal disposal of land or property ordinarily results in a tax charge for the landowner. This will be Capital Gains Tax for individuals or trusts who hold the land or Corporation Tax for companies.
The taxable gain is calculated by taking the sales price and deducting the initial base cost (or Probate Value for inherited assets) as well as any qualifying improvement expenditure and the associated incidental costs of both sale and acquisition.
For Capital Gains Tax, the resulting gain is usually subject to a 20% tax charge to the extend that the gain falls above the higher rate tax threshold (10% for any amount of gain falling within the basic rate threshold). If the disposal is of residential property, these rates increase to 28% and 18% respectively. These higher rates of Capital Gains Tax will not apply if the disposal is of bare land, even when this has planning permission for residential development. It only applies if what is being sold is already being used for residential purposes. This could for example include the garden and grounds of a property.
For Company disposals, the gain will be subject to Corporation Tax which is currently 19%. Business Asset Disposal Relief In some limited circumstances, sales of development land can be structured in such a way as to make use of Business Asset Disposal Relief (formerly Entrepreneurs’ Relief). By utilising this relief, it can reduce the rate of Capital Gains Tax to 10% for up to £1million of gains per individual landowner.
However, because this relief offers such a generous reduction in tax rate, there are a number of conditions which need to be met in order for the disposal to qualify. In the context of the disposal of development land, the most common way of obtaining Business Asset Disposal Relief is for the sale of the land to be within three years following the sale or cessation of business which occupied the land. We have seen situations where a working farmer has sold development land and at the same time retired from active farming with any remaining land then let out under an FBT for example.
Rollover Relief In some cases, the gain arising on the sale of development land can be deferred using Rollover Relief. To benefit from this relief, the proceeds realised from the sale of the land (which must have been used in the landowner’s trade) needs to be reinvested into new land (or anther qualifying asset) within a four year period.
This period runs from 12 months prior to the disposal until three years following the disposal. The newly acquired asset needs to be used in the owner’s trade immediately following purchase. Under Rollover Relief, the gain which would ordinarily arise on the disposal is deferred into the base cost of the newly acquired asset. On the future disposal of the new asset, the gain which is deferred effectively becomes chargeable to Capital Gains Tax. It could therefore be the case that then this gain comes into charge, the tax rate applicable may be higher or lower than the current rates of Capital Gains Tax.
Trading v Investment As mentioned above, the disposal of development land by individuals is ordinarily subject to Capital Gains Tax. However, in certain circumstances it can be subject to Income Tax. In order for any disposal to be judged liable to Income Tax, the landowner will need to be seen to be trading in land rather than holding it as an investment. The actions and intentions of the landowner are key in determining how they are holding the asset.
For example, was the land originally acquired purely with a view to making a profit when selling or were there other intentions, such as using it in the course of their trade. Other examples of when some or all of the gain can be charged to Income Tax include transactions whereby the landowner’s proceeds are linked to the profits made by the developer or where the landowner plays some part in the development of the land. The disparity between the rates of Income Tax (up to 45%) and Capital Gains Tax (20%), mean it is vital to consult tax advisers as early as possible so they can assist with how to structure the transaction.
In any transaction, given the wide variety of rules and reliefs, it is important to ensure that professional advice is sought at the earliest opportunity to ensure that the landowner and their family enjoy as much of the proceeds from the sale as possible. Get in touch with a member of the team to discuss this further.