The complexities of the tax system and the development industry mean that no two cases of selling land for development ever seem to be the same. The difference between a straightforward capital disposal and a more complex development transaction can have significant tax implications. Taking advice early and structuring a sale correctly can help maximise after-tax proceeds and avoid unexpected liabilities.
Below, we explore some of the tax considerations surrounding the sale of development land. In this context, development land is that which has the potential for its use to be changed from its original purpose, such as potential for housing development. Identifying and recording those considerations will be an important first step.
How is a basic land sale taxed?
A straightforward sale of land or property (whether for development or not) normally leads to a Capital Gains Tax (CGT) charge. The gain is calculated like a normal capital disposal; the sale price minus the purchase cost, any qualifying improvement costs, and any incidental costs of purchase or sale.
If an individual holds the asset, this gain will normally be taxable at 24% on the amount of the gain which falls above the higher rate income tax threshold (18% on the amount it falls within the basic rate band
If a company holds the asset, the gain is normally subject to Corporation Tax, currently 25% for companies with profits over £250,000, 19% for companies with profits of £50,000 or less, and a marginal relief between 19 – 25% for companies between £50,000 and £250,000. In some cases, companies can also claim an inflation-related allowance for inflation up to December 2017.
Can Business Asset Disposal Relief (BADR) reduce CGT?
Business Asset Disposal Relief is a tax relief for individuals that can reduce the CGT rate on the sale of certain business assets to 18%, up to a lifetime limit of £1m of gains. This relief can apply to development land in some limited situations.
However, BADR is generally available only where there is a disposal of a business, business cessation, or a sale of trading company shares, rather than the disposal of a standalone asset.
Given sufficient time, structures can sometimes be put in place to increase the chances of a successful BADR claim, but professional advice should be sought before assuming that this relief will be available. Whether development land qualifies will depend heavily on the ownership structure and how the land is used within the wider business.
Can the gain be deferred in any way?
Where gains arising from a sold business asset are reinvested in another qualifying business asset, the gain on the disposal may be able to be deferred until the new assets are sold. This is called Rollover Relief and is available for both individuals and corporates provided:
- the reinvestment occurs within three years of selling the previous asset,
- the business continues trading when selling the old assets and buying the new ones,
- the old and new assets are solely used for business purposes.
Can Private Residence Relief (PRR) decrease CGT?
PRR can reduce or remove CGT when an individual’s main home is sold. This relief can also apply to surrounding land which is less than 0.5 hectares or is needed as part of enjoying the property.
Claiming PRR on a disposal of development land is very much dependent on the facts of the individual case. If the land is being sold to a developer, HMRC may argue that land being sold for development is not necessary for the normal use and enjoyment of the property.
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.
Might the gain be liable to Income Tax?
When land is sold for development, profit is generally subject to CGT or Corporation Tax. However, if HMRC decide that the land was bought with the intention of making a profit, they can charge Income Tax.
There are anti-avoidance provisions to ensure trading profits are not incorrectly treated as capital gains. These apply where the land was:
- bought with the intention of selling at a profit,
- improved or developed before selling, or
- sold as part of a deal where the sale price is dependent on the success of future development of the land.
In these situations, some of the profit will be liable for Income Tax rather than CGT. The distinction between a capital gain and trading profit can have a significant impact on the amount of tax payable. HMRC will consider factors such as the original intention when the land was acquired, the length of ownership, and the extent of any development activity carried out before sale.
What if you sell the land but have the right to a further payment if it is developed?
These overage or clawback arrangements often feature in contracts between a buyer and seller, especially where land is being sold. Broadly, overage is the right for the seller to receive further payments if one or more events occur in the future.
Typically, the overage will be taxable as income where the sale is considered to be part of a business activity or as capital where the transaction is considered as an investment. There are also specific VAT and stamp duty land tax rules which apply in these circumstances.
Other tax considerations: VAT, Inheritance Tax and Valuations
Sales of land are not normally subject to VAT, unless the land has been opted to tax, however, there may be VAT costs on any development and professional fees. These costs can be substantial and without any planning the VAT may not be recoverable. Opting to tax might allow recovery of input VAT, but VAT would then have to be charged on the land sale.
VAT should be considered at an early stage. Whether an option to tax has been exercised can materially affect both the sale proceeds and the recoverability of VAT incurred on professional fees, planning costs and infrastructure works.
The preparation of development land for sale can also have Inheritance Tax (IHT) implications with any growth in value potentially being exposed to an IHT charge on the death of the landowner.
If multiple landowners come together for a development project to share the proceeds of a sale, additional tax and legal issues may arise. With this in mind, it’s key to get professional advice ahead of any sale.
The value of land often increases dramatically when it acquires development value, for example, following its adoption within a Local Authority development plan or following the granting of planning permission. It will be important to take this into account when obtaining valuations for the land under consideration.
Key tax considerations before selling development land
In summary, before agreeing a sale, landowners should consider:
- Whether gains will be taxed under CGT, Corporation Tax or Income Tax rules.
- Whether reliefs such as BADR, PRR or Rollover Relief may be available.
- The VAT position and whether an option to tax exists.
- Any IHT implications arising from an increase in land value.
- The ownership structure and whether changes should be considered before a transaction proceeds.
Early advice can often identify planning opportunities that may not be available once contracts have been exchanged.
We’re here to help
If you are considering selling development land and would like to discuss the tax planning opportunities available to you, please speak to a member of our specialist team or get in touch with your usual Azets adviser.