Development Land & Tax Planning
The UK Government has set out ambitious plans to increase the supply of new homes in the UK.
For example, for the Midlands the plan aims to deliver 215,000 new homes by 2031. This will increase delivery to nearly 16,000 per year from an average of 12,000 over the last three years, and will significantly increase the amount of land being released by local authorities for housing.
In Cheshire East and Cheshire West & Chester the local plans include housing supply objectives of approximately 36,000 and 21,000 houses respectively by 2030.
Coupled with HS2, clearly there may therefore be substantial disruption, but a potential windfall for landowners.
With privately owned agricultural land currently being worth between £7,500 to £18,000 per acre and this figure significantly rising once planning permission for commercial development or residential development granted, it is an appealing option to consider.
Before considering planning applications, you should consult your tax advisor regarding tax implications. This ensures careful planning takes place and any actions are taken in time to mitigate.
VAT
Unless land is “Opted to tax” the supply of land when sold is an exempt supply for VAT purposes. This means that any costs incurred in obtaining planning permission or associated with the sale will be associated with the exempt supply and the input VAT incurred on such costs, will not normally be reclaimable.
It is important therefore that areas of land which are to be put forward for development are considered as to whether an Option to tax should be put in place. It may not always be appropriate.
There are a number of factors to consider in order to put an Option to tax in place which include:
Ensuring the correct documentation is available to identify the land to be subject to the Option to tax.
Making sure that the owner of the land is VAT registered.
Allow sufficient time to submit elections for this to be processed by H M Revenue and Customs and confirmation that the Option to tax is in place before transactions affecting this occur.
Stamp duty land tax (SDLT) (or its Welsh and Scottish equivalents) may be payable on the VAT inclusive price. This may mean an extra cost to the purchaser.
Consider the position of the purchaser. Most purchasers will be able to recover any VAT charged, but if they can’t, this may make any deal less attractive.
Inheritance Tax (IHT)
The time-scale for the sale of development is often unknown and therefore can present significant uncertainty with regard to financial and tax planning and there are a few key issues to consider here.
Where the proposed development or the timings for obtaining planning permission being granted, may be more than a few years away, it is important to consider the potential IHT Risk here as the landowner estate value for IHT purposes may increase quite substantially, due to hope value being realised.
Hope value essentially represents the difference between agricultural value of land and the whole value of land where there is high probability of planning permission or if planning has been granted.
Hope value may not qualify for IHT relief and therefore create significant IHT liabilities and in addition to this, please note that cash (from the sale of land) or land subject to a binding contract for sale would not qualify for Business Property Relief (BPR) or IHT relief.
IHT is due at 40% on chargeable assets, so it is therefore important to review IHT planning options at an early time, as it may be possible to obtain IHT relief with the appropriate planning.
Capital Gains Tax (CGT)
CGT is generally payable at 20%, although a lower 10% rate applies to the extent the seller has not used all of their income tax basic rate band.
A husband and wife may also have their own individual annual exemptions.
Alternatively, if a landowner is considering retirement or changing their business activities then with the correct planning Business Asset Disposal Relief (BADR) may be obtainable, reducing this tax rate from 20% to 10% on the entire gain up to a maximum of £1 million for each individual taxpayer, if the land has been commercially farmed. The relief is therefore of considerable value and its availability should always be considered on the sale of businesses or assets.
There is also a CGT deferral, generally referred to as “Roll-over Relief” which may be available where certain business assets are disposed of. This may be a valuable relief for farming businesses who might be in the process of selling land (in particular development land) and wish to reinvest their proceeds in to Land, Buildings or Fixed Equipment. Please plan early here, as strict time limits exist for reinvestment.
