Many say there is a need for large scale house building in the UK. This brings with it opportunities for landowners, such as owners of estates and farmers, who may consider the sale of land that is suitable for development.
In the vast majority of cases the sale of land that has development potential attached to it will give rise to a Capital Gains Tax (CGT) liability. It may, however, be possible for the landowner to benefit from Entrepreneurs' Relief so as to reduce this liability.
What is Entrepreneurs' Relief?
Entrepreneurs' Relief is a relief from CGT, the effect of which is to reduce the rate of CGT to 10%. The usual rate of CGT depends on whether the taxpayer is a basic rate or higher rate taxpayer. However, considering the probable gains associated with development land, it is likely the majority of the gain would be taxed at 20%.
Entrepreneurs' Relief is aimed at benefitting those whose business is either brought to an end or sold on. The most obvious scenario is where a farming business ends and the farm is sold. It is not aimed at applying to the sale of a specific asset from the business, for example, a distinct parcel of land, however there may be ways to structure a development project so as to be able to claim the relief in such a scenario.
For what land is Entrepreneurs' Relief available?
Entrepreneurs' Relief is available upon the disposal of the following categories of land:
- Land used in a business and included in a disposal of either part or the whole of that business. The land must have been owned by an individual (as a sole trader or in partnership with others) for at least one year prior to the disposal; or
- Land used in a business at the time the business ended. The land must have been owned by an individual (as a sole trader or in partnership with others) for at least one year and the disposal must take place within three years of the date the business ended.
Improving your chances of claiming Entrepreneurs' Relief
Although it is possible to structure a business in such a way so that it may benefit from Entrepreneurs' Relief, there is no set way of doing this. It must be stated that due to factors such as values, ownership and succession plans, no two development projects are the same.
Regardless of the structure that is chosen, it is imperative that the development land is used in a trade with the 'badges of trade' clearly identifiable for a minimum of one year (preferably longer) before the disposal.
Consideration with other taxes
As with any form of tax planning, it is necessary to avoid structuring one's affairs around just one form of tax, but instead to consider other applicable taxes such as Inheritance Tax. For example, one needs to be aware that once farmland, that would likely benefit from Agricultural Property Relief or Business Property Relief, is converted into cash following a sale, it will lose those reliefs. Further lifetime IHT planning may therefore be necessary.
It is also briefly worth mentioning the benefits of registering for VAT and 'opting to tax' the land before a sale to a developer. Although this will mean that VAT would have to be charged on the sale, it does allow the landowner to recover professional fees and other related costs, which can be a significant amount in some cases.
Specialist tax advice is therefore vital and the focus should not simply be on CGT.
HMRC heavily scrutinise claims for Entrepreneurs' Relief on sales of development land by landowners and there are some particular areas that are often seen as weaknesses.
HMRC can in some cases claim that the sale of development land will trigger an Income Tax liability resulting in a significantly higher tax liability. They take this stance because although the initial transaction is for the disposal of a capital asset (i.e. land), which is subject to CGT, the subsequent transaction relates to the right to part of the developers profits. This is often called a 'slice of the action' scheme.
It is also necessary to consider HMRC's anti-avoidance provisions; in particular, the General Anti-Abuse Rules and whether the structure that is proposed would fall foul of these rules.
This is only meant as a brief summary of Entrepreneurs' Relief. It is not only a complicated area of tax legislation but, as stated above, each case will merit its own structure based upon the facts of that project. Because of this it is important that before you consider proceeding with any development project (or agreeing to land being promoted for development by another) you seek the advice of your accountant or lawyer. It is also important that this advice is sought at an early stage with immediate consideration given to the ownership of the land, the trading activity undertaken on the land, the legal agreements already in place and business accounts.