Selling UK land: useful tax points for landowners
1 February 2018
Sophie Dixon provides a useful summary of the key tax points that both landowners and their advisors should consider when selling UK land
A number of taxes are likely to apply when selling UK land, whether payment is received on completion or over several years. Planning ahead is therefore vital to avoid complex and expensive tax issues.
Capital gains tax
Allowable deductions can be made from the proceeds of sale for the purposes of capital gains tax (CGT). These include the acquisition cost, or probate value if the land was inherited, incidental selling costs, and the cost of any additions or improvements that are present at the date of disposal. Individuals will be required to pay CGT on the value of gains that exceed their annual exemption, which is presently £11,300. Gains above the limit will be subject to CGT at a maximum rate of 20% for non-residential property.
The Finance Act 2016 introduced an upper rate, with a current maximum of 28%, which applies to gains realised on residential properties. The relevant legislation defines residential property gains as those realised on disposal of a dwelling, or of certain rights under contracts for off-plan purchases. A ‘dwelling’ is defined for these purposes as land that during the period of ownership consisted of or included a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use, as well as any garden and grounds that are or are intended to be enjoyed with it. As such, land with planning permission to convert a property for residential use may be covered, and certainly will be when any building or conversion work begins.
Profits realised from a trade that deals in or develops land are chargeable to income tax at rates of up to 45%; a CGT rate of up to 28% therefore seems more appealing. In some cases, these favourable rates have led property developers and dealers to design structures that were intended to disguise their trade, thus ensuring that the profits of sale were deemed to be capital gains rather than income.
In response, the existing anti-avoidance rules were widened in the 2016 budget, so, now, any profits that essentially arise from trading in land will be charged to income tax, or corporation tax for companies.
However, ascertaining whether an individual is trading may not be simple. Consideration should be given to the intention of sale and to the conclusions of tests commonly referred to as ‘badges of trade’. When considering the sale of land, appropriate badges may include the following, all of which would point towards a trading motive.
- Profit motive: was one of the main purposes of acquiring the land to realise a profit from its disposal?
- Frequency and number of similar transactions: has the seller made a number of similar sales previously?
- Connection with an existing trade: is the seller associated with a property development business?
- Finance arrangements: was the land purchased using short-term finance?
- Length of ownership: was the land only held for a short time before resale?
Agreements between landowners and promoters or developers that create the right to share in the proceeds of any subsequent development potentially fall under this anti-avoidance legislation. Often known as ‘slice of the action’ contracts, many feature an initial capital sale and later payments subject to certain criteria, for example the building of a certain number of houses. As such, later payments received by the landowner may be deemed to be trading income, as the seller is said to have an interest in the trade of the purchaser.
Information for your advisor
Detailed information, as below, needs to be provided to your tax advisor, so they can offer the most effective support for any reliefs or claims should HMRC raise an enquiry into the sale later.
Where your land has been purchased, your advisor may request a copy of the completion statement or transfer deed to establish the allowable cost. The probate value will be used to calculate any gain for inherited land. It may also be useful to provide copies of the will or other deeds.
Should you have received the land by way of a gift, details of any reliefs claimed at the date of the gift – for example, holdover relief for agricultural land – will ensure that the appropriate cost is deducted. If the land was acquired before 31 March 1982, the cost is deemed to be the market value on that date and an appropriate valuation will be required.
Additions and improvements
Capital improvements to a property are an allowable deduction to the extent that they have been incurred wholly and exclusively on the land to enhance its value, and are reflected in the state and nature of the land at the date of sale. Examples may include drainage and planning fees. Where incurred, these should be clearly documented and the details provided to your advisor.
HMRC will allow deductions for professional fees that are wholly and exclusively incurred as part of the disposal of the land. Common examples include agents’ fees, legal fees and promotion fees. Where possible, fee notes that detail the work completed and name of the land can help to support a deduction. Where generic fee notes are provided, it may not be possible to deduct the whole fee and instead only a proportion may be allowed.
Evidence of intentions
Determining whether a profit on disposal of land is trading income or a capital gain on an investment can be a complex judgement based on a variety of facts and inferences. To the extent that evidence of the landowner’s intentions as badges of trade at key times can be provided, this will help establishing the correct tax treatment of the sale.
Determining whether a profit is trading income or capital gain is complex
Managing VAT liabilities
Should the landowner be VAT-registered, the supply of land and buildings as a freehold sale is generally exempt from VAT; therefore no output VAT would be charged on the sale cost. Landowners may have the opportunity to opt to tax their land, and in doing so they will make the sale a standard-rated supply attracting output VAT, currently at 20%. One of the benefits of opting to tax is that, normally, landowners will be able to recover VAT incurred on promotion fees, professional fees or selling costs that would otherwise have been non-recoverable. Should a landowner look to register an option, they must meet HMRC’s conditions or apply for permission from HMRC.
An option to tax may follow the land for up to 20 years. One effect of this would be that, should the land be commercially let – either by the purchaser or current landowner – output VAT may be chargeable on commercial rents.
There are some circumstances in which an option can be revoked; however, these can be difficult to realise. An option may affect the sale value or rental value of the land because exempt bodies, for example a pension fund, will be unable to reclaim any VAT incurred.
Stamp duty land tax (SDLT) is calculated on the VAT-inclusive sale value. An option to tax will therefore affect the SDLT charge and, depending on the terms of the sale agreement, may have an impact on the sale proceeds.
We would strongly recommend seeking professional advice as soon as possible to avoid the pressure of a looming completion deadline.
Points to consider
From our experience of dealing with landowners, we have identified some common pitfalls and other points to consider during the sale.
Where available, entrepreneurs’ relief (ER) provides for a lower rate of CGT, currently 10%. This can represent a considerable tax saving; for example an individual with a chargeable gain of £10m who makes a successful ER claim will save £1m of CGT. To qualify for relief, a number of conditions must be met, and these should be reviewed thoroughly.
Frequently overlooked is that relief will only be available to assets of a qualifying trading business. This would include, for example, the letting of furnished holiday accommodation meeting certain conditions, but not the passive long-term letting of residential or commercial property – that is, a letting where there are no other, additional services provided.
Where the qualifying business has ceased, there is a limited period to dispose of the assets before any entitlement to ER is lost. A further condition is that ER is available for gains that arise from the sale of land when this is part of a disposal or cessation of the whole or part of a business. Where there is no sale or cessation, ER is not going to be available.
Consideration by instalments
The manner in which individuals receive payment can affect both the tax treatment and timing of tax payments. Where the value of later instalments is ascertainable at the date of the sale contract, these will be taxable at the date of completion, potentially creating a cash-flow issue because CGT payments fall before the receipt of sale proceeds.
Should landowners be entitled to an overage payment, these may be chargeable to income. It is therefore essential to clarify dates and values of any instalment payments, and the conditions that give rise to any subsequent payments.
Investment of proceeds
Occasionally, professional efforts have focused on completing the sale, taking little time to consider how proceeds might be invested to use available tax reliefs. Where landowners intend to re-invest, certain qualifying assets or investments may provide relief for CGT or income tax.
Where assets on an estate have been converted from land to cash, any business property relief and agricultural property relief, for example in the case of farmland sold, will no longer be available. The value of land in an estate may have qualified for an exemption of up to 100% as qualifying property; however, following the sale, the value is now held as cash and is fully taxable. To preserve relief, the landowner could re-invest the proceeds in a qualifying asset in the appropriate timescale, but should also consider their inheritance tax planning.
Sophie Dixon is a tax advisor for Grant Thornton’s private client and rural services team