Compulsory purchase impacts for rural landowners

Where land is acquired by a body possessing compulsory purchase (CPO) powers, except where acquired under a contract, the date of disposal for tax purposes is when the compensation is agreed, rather than the date possession of the land is acquired by another.

Often compensation will not be agreed for a significant time after the acquisition of the land, due to the individual elements that make up the payment. In many cases this process can take many years and may often end up in the Land Tribunal to adjudicate.

In legal terms, compensation for a compulsory purchase is a single sum. However, for tax purposes legislation allows the sum to be split into its constituent ‘income’ and ‘capital’ elements with differing tax treatments for each. Often the total sum payable will be made up of a sum for the land itself, disturbance and severance.

Disturbance may include several items and considers the impact on the landowner’s business as a result of the compulsory purchase of their land. The most common elements of disturbance compensation are:

• compensation for losses on stock and loss of profits (subject to income tax as part of normal trading results)
• compensation for loss of goodwill (subject to capital gains tax)
• compensation for expenses incurred (offset against said expenses)

Any remaining amounts are chargeable to capital gains tax to the extent they derive from capital assets.

Compensation for severance, sometimes called injurious affection, is paid to landowners for a fall in value of their remaining land caused by the compulsory purchase.  For tax purposes any severance award is treated as a part disposal of the landowner’s remaining land and subject to capital gains tax in the normal way.

Where a landowner sees only a part of a land holding acquired under CPO, for tax purposes they will usually require a valuation of the retained land to apportion costs under the part disposal rules. However, HMRC accepts that an alternative basis may be used to mitigate the burden on landowners on incurring this additional cost in obtaining a valuation. Under the alternative basis the land disposed of is treated as a separate asset and costs are apportioned on a just and reasonable basis. This for example could be done with reference to acreage of the land disposed and land retained. This alternative basis also applies for severance.

Rollover relief is usually only available for the disposal of specific assets used in a trade, for example when in-hand farmland is sold and further land to be used in the farming trade is acquired. However, when land is sold by compulsory purchase the rules are extended:

• Proceeds must be invested in new land (this means improvements to existing land or buildings do not qualify)
• The date of disposal is when the amount of compensation is agreed, not when the asset is disposed of
• The new asset does not have to be used for business purposes
• A dwelling house can qualify for relief but not if it is or becomes the landowner’s main residence within six years after acquisition
• The landowner must not have taken any steps to dispose of the land or made their willingness to sell known to the body with compulsory purchase powers

It is important to note that it is only the compensation for land that can be rolled over, as disturbance payments will likely be subject to income tax and severance payments are not because a direct result of the land disposal.

The usual time limits for rollover still apply. The new land must be acquired, or an unconditional contract for the acquisition of new land entered into, in the period beginning 12 months before and ending three years after the date of disposal of the land compulsorily purchased. HMRC has outlined in its Statement of Practice D6 that these time limits may be extended where land that has been compulsorily purchased is let back to the previous owner until such a time as the new owner actually requires the land. In these instances HMRC accepts that the time limits for reinvestment are extended, such that the three year period does not commence until the land ceases to be used by the previous owner in their trade, so when the new owner is ready to occupy or develop the land.

Where a landowner has opted to tax their land (they have waived the exemption over the land) HMRC will consider the compensation received to be on a VAT-inclusive basis. The VAT treatment of disturbance elements of compensation will follow the underlying treatment of the land itself, so where the landowner has opted to tax then VAT will also apply on the disturbance elements. Payments related to severance or injurious affection are not considered a supply for VAT purposes and so no VAT is due.

This may mean that landowners who have opted to tax their land could find themselves receiving less compensation that envisaged.

As an option to tax cannot be revoked until a period of 20 years has elapsed, some landowners may find this unwanted tax burden unavoidable.

If you would like to discuss any of the above, please get in touch with your usual contact or the contacts listed.

Approval code: NTEH7052499