This sounds like such a simple question. But the reality is that the complexities of both the tax system, and the development industry, mean that no two cases ever seem to be the same.
Professional tax advice is vital in any such sale. This should be taken as soon as possible, as sometimes simple tax planning techniques undertaken sometime in advance can lead to a better tax result.
How is a basic land sale taxed?
A straightforward sale of land or property (whether for development or not) would normally lead to a Capital Gains Tax (CGT) charge. The gain is calculated as the sale price, less the purchase cost and any qualifying improvement expenditure, and less any incidental costs of purchase or sale. Just like a normal capital disposal.
Where the asset is held by an individual, this gain will then normally be taxable at 20% to the extent that it falls above your higher rate income tax threshold (10% to the extent it falls within your basic rate band). The higher 28% CGT rate which applies to disposals of residential property will not apply to a disposal of bare land, even if it already has planning permission for residential property to be built, but would apply if what you are selling is already residential property.
Where the asset is held by a company, the gain (less an additional indexation allowance up to December 2017) would normally be subject to Corporation Tax, currently 19%.
Can Entrepreneur’s Relief reduce the CGT on the land development gain?
Entrepreneurs Relief is a tax relief for individuals that can reduce the CGT rate on the sale of certain business assets to 10%. This relief can apply to development land in some limited situations.
Entrepreneurs Relief can be available on disposals of a trade or assets that are associated with the disposal of a trade.
However, a requirement of Entrepreneurs Relief is that there is either a disposal or a cessation of the underlying trade or a material disposal of trading company shares; it is not sufficient that there is a disposal of just an asset used in a continuing business. Given sufficient time, structuring can sometimes be put in place which can maximise the chances that a claim for ER will be successful, and it is vital that you seek suitable advice before assuming that this valuable relief will be available.
There are of course further conditions attached to the availability of ER and further information will be available in due course.
Can the gain be deferred in any way?
Where the old asset was used in a trade and the proceeds received from the capital disposal are reinvested in certain trading capital assets, the gain on the disposal might be deferred until the ‘new’ assets are sold. This is called Rollover Relief and is available for both individuals and corporates.
Certain conditions must be met in order to qualify for Rollover Relief and these are explored further in a forthcoming blog.
Alternatively reinvestment into certain other types of investment, such as shares qualifying for the Enterprise Incentive Scheme, will also allow gains to be deferred. We have separate blog posts on the EIS located here.
Can Principal Private Residence Relief (PPR) be used with land development gains?
PPR relieves all or part of a gain that relates to the sale of an individual’s main home and any surrounding land that is less than 0.5 hectares or is required for the reasonable enjoyment of the property.
Claiming PPR on a disposal of development land is very much dependent on the facts of the individual case.
One of the problems is that for PPR to apply, any land attached must be required for the reasonable enjoyment of the property. HMRC can quite reasonably take the view that if the land is being sold for development then it is not so required and the relief would not therefore be available.
Establishing and documenting the facts and circumstances in respect of the land subject to the sale are vital in determining whether the relief is due and it is advisable that advice is sought.
Further information on PPR will be available at a later date.
Might the gain be liable to Income Tax?
Gains on the sale of assets held as an investment are normally subject to CGT or Corporation Tax accordingly.
However, where there is a trade, any profits are subject to Income Tax. For individuals, this is at a higher tax rate than that which applies to capital gains.
Trading ventures have different features to that of holding an asset for investment purposes. The actions and intentions of the landowner need to be considered to determine whether or not a trade is in existence.
It is of course possible to have a change of intention during the period of ownership and such an event can of itself lead to a tax charge.
There are also anti-avoidance provisions which can subject a proportion of any gain on disposal to income tax. These apply where (amongst other things) the land was originally acquired to sell at a profit, where there has been development of the land prior to any disposal, or where the sale price might be variable according to the eventual result for the developer; the rules essentially deem a trading activity to be taking place.
It is important to keep your tax advisors in the loop where there are any potential developments in the broader sense, in respect of your landholdings.
Further details on where profits can be subjected to Income Tax will be provided in due course.
Any other tax implications?
While sales of land are not normally subject to VAT (unless the land has been opted to tax), there is the VAT position of any development fees and professional costs to consider. These costs can be substantial and without any planning the VAT can be lost. Opting to tax might allow recovery of input VAT, but VAT would have to be charged on the land sale.
Stamp Duty Land Tax (SDLT) is payable by the purchaser of any land. While this is not necessarily a consideration as a seller of land, if any advance planning is considered then SDLT can become an important consideration. Also, if VAT has to be charged on the land sale, then the SDLT is on the VAT inclusive amount.
The preparation of development land for sale can also have Inheritance Tax (IHT) implications. The growth in value of the land might leave it exposed to an IHT charge on the death of the landowner. Farmland, say, might not be fully protected by Business Property Relief or Agricultural Property Relief, especially where the business ceases, so this also needs careful consideration.
Another point which often causes complications is the existence of multiple landowners coming together for a development project, especially where they form some sort of “consortium” or “collaboration” in order to share the proceeds.
Additional information on the above will follow.
The sale of development land is complex and the numbers involved are often substantial. Early tax planning can help to increase the money available to landowners after the sale and avoid unexpected results.
There are a large number of different taxes involved and they do not necessarily combine cleanly with the commercial aspects of any sale. The whole position needs to be considered and viewed holistically.
There are a number of tax traps, and while reliefs can be available, these are reliant on getting the right advice in place early in the development process and implementing that advice effectively.
Here at Ensors we have the experience of dealing with the complexities of these transactions and orchestrating the team of professional advisors; accountants, lawyers and surveyors, to get the best result for landowners large and small. For more information, please contact me.