Tax: rules for profits from trading in or developing land

Taxing times

17 February 2017

Robert Walker considers rules for "profits from trading in and developing UK land" announced in the last budget

The latest set of provisions with an impact on UK real estate are the new rules for profits from trading in or developing land.

These were introduced to ensure that all profits from such activity are subject to UK tax, irrespective of whether the company carrying on the trade is based in the country.

They also include a set of provisions that replace the old "transactions in land" rules. While the replacement provisions were not intended to make significant changes to the distinction between trading and investment, their scope appears to have been extended so that they include situations that were not previously covered.

The main rules took effect on 5 July 2016, with the provisions against avoidance having taken effect on 16 March, shortly after the budget itself. The new rules fall into the following 4 categories:

  1. extending corporation tax
  2. replacing existing provisions
  3. anti-fragmentation
  4. anti-avoidance.

Extending corporation tax

UK corporation tax will be extended to non-UK resident companies whose trade is dealing in UK land or developing it for the purposes of disposing of it.

The rule will apply whether or not the trade is carried on through a permanent establishment in the UK. The intention is to tax all non-UK traders in UK land on the whole of their profit wherever it arises, and the rules effectively supersede, and extend, the existing "diverted profits tax" rules.

Replacing existing provisions

The existing rules for transactions in land were broadly designed so as to ensure that profits from activities fundamentally trading in their character were taxed as income rather than as capital gains.

Although the stated aim of the new provisions is broadly the same and was not intended to change the distinction between investment and trading, there are alterations to the wording that appear to broaden significantly the applicability of the provisions.

The key change is that the old rules applied where the "sole or main object" of acquiring the land was to realise a gain on its disposal, whereas the new rules merely require that "one of the main purposes" of acquisition is to realise such a gain.

There are various reasons for holding land and property, in particular to use it as a source of income and capital growth

There are various reasons for holding land and property, in particular to use it as a source of income and capital growth. The change in wording means that the new test could inadvertently apply to straightforward investments where capital growth is one of the main purposes, and so turn what was investment activity into trading.

For example, could a buy-to-let landlord who would have previously suffered capital gains tax at 28% on the ultimate disposal of the property now be faced with an income tax charge of 45% under the new rules?

HMRC has said this is not its intention. While the new provisions are drafted to have a wide application, various assurances have been made, and it is expected that HMRC will seek to clarify the position by publishing guidance.

Both the old and the new rules can also impose a tax charge, in certain circumstances, on the sale of shares that derive their value from land. A key change has also been made here, in that the exemption for companies which hold land as trading stock has been removed.


A new "anti-fragmentation" rule has been introduced, which may increase the profits that are chargeable to UK tax.

These provisions apply where a company is trading in land – that is, it is the main trader – but the profits in that company do not represent all the profits relating to the development; that is, a "contribution" to the development is made by an associated person who is not subject to UK tax. The provisions subject the main trader to tax on the profits of this contributor, unless they are already subject to UK tax.

Any kind of contribution is covered, including financial, which in turn includes the assumption of risk.

The definition of "associated person" includes entities that have only a 25% connection with the main trader. Notwithstanding that the main trader may hold only 25% ownership of the "contributing entity", 100% of the contributor's profits, if these are not already subject to UK tax, could be taxed on the main trader.


Finally, anti-avoidance provisions are now in effect to counteract arrangements that are intended to avoid any of the rules mentioned above.


It is fair to say that the breadth of the new provisions has taken the real-estate sector a little by surprise. The impact appears to be potentially far greater than the government's initial announcement in the March budget suggested. It is hoped, however, that the promised HMRC guidance will clarify that the intended impact is less than the strict wording of the legislation suggests.

Robert Walker is Partner and Real Estate Tax UK Network Leader at PricewaterhouseCoopers LLP

Further information

Related competencies include:

This feature was taken from the RICS Property journal (December 2016/January 2017)