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Development land and tax

With an increasing number of our clients selling land for development, it is essential to take tax advice at the earliest stage possible.

Factors such as the current ownership of the land, how the disposal will be structured and plans for the sales proceeds all need to be considered as part of the tax and commercial planning exercise.

For example, a disposal of land or property normally results in a tax charge for the owner, with Capital Gains Tax (CGT) for individuals and trusts who hold the land or Corporation Tax for companies.

The taxable gain is calculated by taking the sales price and deducting the base cost (or probate value for inherited assets) as well as any improvement costs and associated incidental costs of both sale and purchase.

For CGT, the resulting gain is usually subject to 20% tax, or worst case, 28% for residential property sales.

For company disposals, the gain will be subject to Corporation Tax which is now 25% worst case.

In some limited circumstances, sales of development land can be structured in such a way as to make use of Business Asset Disposal Relief (BADR). By utilising this relief, it can reduce the rate of CGT to 10% for up to £1million of gains per individual landowner (not applicable to companies).

However, to qualify for BADR, there are a number of conditions which need to be met. For the disposal of development land, the sale of the land has to be within three years following the sale or cessation of business which occupied the land. Given this, it may sometimes be appropriate for a working farmer who has sold development land to retire from active farming and let out any remaining land held under an FBT arrangement.

It is also possible to defer the CGT on the sale of development land using Rollover Relief, which requires the sales proceeds to be reinvested into new land (or another qualifying asset) to be used in the owners trade immediately within a four year period, which runs from 12 months prior to the disposal until three years following the disposal.

In some situations it might be possible for a company to dispose of the land with no immediate tax charge arising if adequate time ahead of a sale is possible.

Also – watch out for trading in land! Normally, the disposal of development land is subject to CGT. However, if HMRC can argue that the land was originally acquired with a view to generating a profit on re-sale, income tax at 20%/40%/45% with National Insurance could be applied.

Given the wide variety of rules and reliefs, it is important to speak to us as early as possible if you are contemplating a land sale.

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