Following the demand for new housing across the country, landowners are being approached to sell their land for development much more frequently.

Very often the land will be acquired by a house builder by way of an option or a contract, conditional on obtaining planning permission.  Land promotion agreements have also become popular, with landowners and the promoter generally promoting the land at its own cost and risk.  Once planning permission is granted, the land is marketed and sold to a house builder.

Also, neighbouring landowners often collaborate and share proceeds of any sale in proportion to their respective acreages, regardless of which plots of land are acquired by the developer.

There are a number of tax questions to consider including:

1. Will the sale attract capital gains tax or income tax?

The profit from disposal of land that has been occupied by the landowner for their business or rented out to a tenant is normally charged to capital gains tax (28 per cent).  Conversely, land acquired or developed with a view to realising a profit is normally liable to income tax at rates of up to 47 per cent if national insurance is due.

The transaction may also be caught by anti-avoidance tax legislation, which will result in the profit being chargeable to income tax.  It is clear that sharing profits with the developer will also be liable to income tax.

2. Is there a potential double charge to capital gains tax?

Collaboration agreements can give rise to the risk that capital gains tax can apply twice in circumstances where one landowner receives sale proceeds (and is taxed on them), but  then passes a share to another land owner (without any tax deduction allowed), who is also taxed.

Despite the complexities, careful planning can make the sale of development land extremely tax-efficient.

3. Is there any possibility of claiming entrepreneur's relief?

If the landowner has used the property in a business (e.g. farming) for at least 12 months up to the sale date, it may be possible to reduce the rate of capital gains tax from 28 per cent  to 10 per cent claiming entrepreneur's relief.  This would have to be a genuine business and it is likely that the landowner would need to cease business on or before the sale date but the tax savings by claiming this relief could be substantial.

4. What is the VAT position for the land sale?

Sometimes the landowner will incur large VAT charges on costs related to the sale, such as planning expenses or a promoter's fee.  The VAT on such expenses may be recoverable if the landowner registers for VAT (if not already registered) and opts to charge VAT on the property.

As with all such tax situations, advice should also be sought before proceeding.

Alan Boby at Ellacotts LLP on 01295 250401 or email aboby@ellacotts.co.uk

 

Alan Boby

Ellacotts LLP

 

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