Selling countryside land for development
With the UK needing more houses, and farming facing an uncertain future, many landowners have been tempted to sell part of their land holdings to housebuilders for development.
If you’re a landowner negotiating a sale, you would naturally want to maximise your cash proceeds and take as much cash upfront as possible. Developers want to minimise their risk by deferring as much of the purchase price as possible in case they don’t get planning permission or the development doesn’t happen for some other reason. Neighbouring landowners often agree to work together to maximise total proceeds from all their land and agree a split between them.
All this can give rise to some quite complicated tax issues. They need to be managed carefully to maximise your opportunities and avoid pitfalls.
Sale price in instalments
Where the sale price is fixed and is to be received in instalments, the whole amount to be received is taxable at the date of sale, not just the initial instalment. It is important therefore to ensure that the first instalment is sufficient to cover any tax and immediate costs incurred. Where the amount of future instalments is uncertain, a valuation has to be made and included in the initial calculation.
The reason for the future instalments being uncertain needs to be established. If it is because the developer hopes to get an enhanced planning permission (typically with fewer “affordable” homes having to be built) which increases the value of the land, the tax treatment is unaffected and remains within the ambit of capital gains tax. If, however, future instalments are linked to the developer’s profits on the sale of houses – what is commonly known as a “slice of the action” – we would be straying into income tax territory.
Arrangements between neighbouring landowners
What if you enter into a pooling arrangement with neighbouring landowners? Under a pooling arrangement, landowners work together to maximise the total proceeds from all the land rather than just their own holding.
Here’s an example involving two landowners. If a developer wants to buy Landowner A’s land, but not Landowner B’s, then the pooling arrangement would provide for a sharing of the proceeds, and the same of course when Landowner B’s land is sold.
There is a danger for Landowner A whose land is sold: he could be taxed on the whole proceeds, without any tax deduction for the amount he pays away to his neighbour – a double tax charge.
A further problem is that Landowner A selling the land would be entitled to Entrepreneurs’ Relief, the 10% capital gains tax rate, assuming of course he is farming it. But his neighbours would be in receipt of a sum of money from Landowner A, which doesn’t qualify for the relief and so would be taxed at 20%.
Another concern is that if the pooling arrangement constitutes a partnership, capital gains tax and SDLT (stamp duty land tax) charges can arise on entering into the pooling arrangement. If there is no partnership then there is no immediate tax, and each landowner is regarded as continuing to own their piece of land.
Simply entering into a pooling arrangement to maximise the price shouldn’t normally give rise to a partnership. On sale, you should be taxed on the difference between your share of the proceeds less what you originally paid for the land, in the usual way. A partnership could arise if the landowners intend to develop any of the land themselves.
Both these tax issues can be avoided by careful structuring. It is normal practice to approach HMRC for an advance clearance that they agree that no partnership is created.
Basic infrastructure before development
Even where the landowners aren’t intending to develop the land themselves, purchasers sometimes require basic infrastructure to be put onto the land before purchase. Historically HMRC has not regarded such works as development, but more as enhancement expenditure designed to make the land more saleable to a developer. This means it should still be possible to enter into the pooling arrangement without creating a trading partnership, if all that is intended is to put basic infrastructure on the land before sale.
Where you develop land you own with a view to sale, any profit attributable to the development can be taxed as income at rates higher than the capital gains tax rates. As we noted above, historically HMRC has not regarded basic infrastructure works as development. The land income tax rules have recently been substantially revised, although it is not thought that HMRC has changed its practice in this area.
Where you build infrastructure on your own land, you should be able to deduct the cost against the sale proceeds you receive for the land. If under a land pooling arrangement you contribute to the costs of infrastructure to be built on a neighbour’s land (e.g. an access road), the capital gains rules do not allow deduction for the cost of those works against the sale proceeds from your land. With careful structuring, this can be dealt with by agreeing the sharing of proceeds to reflect the respective contributions by each party to the infrastructure.
The tax position will depend on the precise arrangements between landowners; legal drafting should be reviewed for tax issues. Where you are uncertain of the tax position, you should seek the advice of a suitably experienced specialist.
Tax on land sales may not be simple. With our experience in property and tax, including rural land ownership, we can help make it clearer and support your plans. For more information, please get in touch via your usual BKL contact or use our enquiry form.