Continuing demand for new housing nationally means property developers will remain on the lookout for appropriate land to buy for the foreseeable future.
Many landowners are non-corporates such as farmers selling off surplus fields or householders selling off grounds/parts of gardens and it is the tax position of these sellers we will focus on in this blog.
Capital Gains Tax (CGT) versus Income Tax (IT)
One could be forgiven for assuming profit on the sale of land, as a capital asset, would be subject to CGT.
This is not necessarily the case and depending on the exact circumstances, the profit may instead be subject to higher IT rates.
This could be the case for instance if:
- The seller has sold several pieces of land and so could be seen to be trading in land;
- The seller has already carried out some development (even if fairly limited) themselves on the land before selling or;
- part of the consideration is dependent on the profitability of the development itself.
The structure of the sale and the circumstances surrounding the land sale are therefore very important from a tax perspective.
Rates of CGT
Even if the landowner can satisfy themselves that the gain will not be taxed as income, the question arises as to what rate of CGT will apply.
For gains not covered by the CGT annual exemption (currently £12,300 in total) there are four possible rates being 10%, 18%, 20% and 28%.
If the land being sold is residential the higher rate of 28% is likely to apply (or 18% on the part of the gain which doesn’t exceed the level of any remaining basic rate IT band the landowner has).
If the land is non-residential (e.g. a farm field), a rate of 20% applies (or 10% on the part of the gain which doesn’t exceed the level of any remaining basic rate IT band the landowner has).
In some cases the sale of the land can be structured as part of a disposal of a trading business.
If so, more of the gain or even all of the gain (depending on the quantum of the gain compared to certain business CGT relief limits) might be charged at 10%.
Other CGT reliefs
It is possible to “roll over” a gain on certain business assets within specific time limits into the purchase of new business assets.
If this relief is available and is claimed, a tax charge can be avoided at the time of the disposal of the land.
The gain would instead ultimately become chargeable on eventual sale of the replacement asset.
Another potentially useful relief is ‘main residence’ CGT relief which exempts gains made on the main residence from tax either in part or altogether.
This could apply if, for instance, part of a garden is being sold for development.
The part of the garden being sold off must have been enjoyed as part of the taxpayer’s residence amongst other conditions.
What about VAT?
If commercial land is being sold, it may be possible to ‘opt to tax’ the land which means on a sale, the landowner will charge VAT.
As the developer can normally recover the VAT as input tax this is unlikely to unduly faze them even if it does represent a short-term cash flow constraint (as the VAT would need to be paid and then claimed back).
Opting to tax the land enables the landowner to reclaim VAT on costs such as professional fees incurred on advice received in relation to the land sale.
These can be significant, particularly if the sale is structured as a promotion agreement with a land promoter charging a commission based on the sale price of the land.
One other point to watch for is that while the VAT charge itself is not normally a cost for the developer, the price increase caused by the VAT will mean extra stamp duty land tax for them so it is likely they would seek to recoup an element of this through a reduced purchase price.
How can we help?
This is a brief review of some of the tax complexities which arise for a landowner on the sale of land for development.
If advised properly, the overall tax burden can be managed well. The overall cost of getting it wrong will usually far outweigh the cost of getting appropriate tax advice.
If you have any queries relating to selling land for development, please contact your usual relationship principal or email firstname.lastname@example.org.
The author takes every care in preparing material to ensure that the content is accurate and up to date. However, no responsibility for loss occasioned to any person acting or refraining from acting as a result of this material or from making use of this material can be accepted by the author.