Strategic Land – when is it sold?

When developers buy strategic land, they often pay for the land as they take possession. The date for payment of capital gains tax (CGT) depends on how the sale documents are drafted. Where land is sold as trading stock, the rules are different. We consider the CGT position on a site with one landowner. Multi-landowner sites can have different problems, but the basics are the same.

The basic principle is that the date of disposal for capital gains tax (CGT) including for non- residential land is the date of exchange of unconditional contracts. The date of payment of the tax is 31 January following the end of the year of assessment in which the disposal is made for an individual, or nine months after the year end for a corporate.

The legislation states that, although the date of exchange fixes the date of disposal for tax purposes, there is no actual disposal until completion takes place. For example, if there is staged completion there will be several sales, but they will have the same date of disposal for CGT purposes.

Strictly, the tax is not due until there is a disposal, that is, after completion takes place. For example, assume a single unconditional contract is exchanged in March 2021, and completion takes place on one half of the site in April 2021 and the second in April 2022.

The tax attributable to the first site will be due on 31 January 2022 and the second on the disposal of the second site in April 2022. As the legislation says the tax is due on 31 January 2022, interest will be due from the normal due date – 31 January 2021 - even though the tax does not have to be paid until the disposal takes place.

Care has to be taken where the site includes any residential property. From 6 April 2020, if the land being sold includes, or has included a dwelling at any time, then the CGT is payable within 30 days of completion. These new payment dates do not apply to disposals by a corporate.

Conditional contracts

If the land is being sold on a conditional contract, the legislation says the disposal takes place when the condition is satisfied, assuming the condition is fundamental to the contract going ahead. For example, if a contract is dependent on the lifting of a restrictive covenant, the date of exchange for tax purposes is the date the restrictive covenant is lifted, which may be in a later year of assessment in which contracts are exchanged.

Contrast this with the position where the contract is rescindable; for example, completion will not take place if the restrictive covenant is not lifted. If the contract can fall away because something does not happen, the relevant date for tax is the date of the original exchange of contracts. People use rescindable contracts where they want to keep the taxable date at exchange but provide for the contract fall away if need be for some agreed reason.

HMRC put in place anti-forestalling rules to stop people taking advantage of them for Entrepreneurs’ Relief planning when the level of relief was reduced in March 2020.
The exercise of an option is generally more straightforward for CGT purposes in that the disposal date is the date the option is exercised. Many option agreements provide for staged exercise, especially on a larger site, so the tax becomes due based on the date of exercise over that part.

Overage arrangements

Sales of strategic land often contain an overage arrangement where an additional sum becomes due, based on the quality of the planning permission, or the impact of any S106 planning agreements or indeed, the developer’s sale proceeds.

In these circumstances, the landowner receives his cash plus a right to possible future additional consideration. The right to future consideration is not an interest in land as the land has been sold but rather a legal right to additional proceeds. The right to additional proceeds in the future has to be valued at the time of sale and added to the cash proceeds received on completion. When any overage payment is received it is in respect of the legal right rather than land.

Whether the receipt in respect of the overage is income or capital depends on the source of the payment. If for example, the payment is based on the sale proceeds of the developed residential properties, it will be income and not capital.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Ref: NTNPW0820101

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