Development Land & Tax Planning
By Julie Jarvis, Senior Tax Consultant at WR Partners
The UK Government has previously announced that they plan to supply 300,000 new homes a year in the UK by the mid-2020s. Due to COVID-19, this target figure hasn’t been reached yet, with only 216,000 new homes built in 20/21. Beforehand, however, new homes were on the rise year-to-year, with 243,000 new homes built before the outbreak in 19/20.
This could mean a potential windfall for landowners in the near future. With the value of privately owned agricultural land significantly rising once planning permission for housebuilding is granted, it is an appealing option to consider. However, there are tax implications and these should be considered with your tax advisors before planning applications are considered. This ensures careful planning takes place and any actions are taken in time to mitigate the tax costs associated with any disposal or tax planning.
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 is unlikely to 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.
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.
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 VAT position of the purchaser. Most purchasers will be able to recover any VAT charged, but if they can’t this may make the deal less attractive.
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 (higher rates may apply if the land has been used for residential purposes). 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 Entrepreneur’s relief may be obtainable, reducing this tax rate from 20% to 10% on the entire gain up to a maximum lifetime allowance of £1 million per person, 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 “Rollover 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 additional Land, Buildings or Fixed Equipment. Care needs to be taken where time limits exist for reinvestment
There are numerous tax issues to consider to include inheritance tax, along with family succession and commercial factors, but it can be possible to find a balance between these considerations. Always plan ahead and take advice as early as possible to retain as much flexibility as possible.
