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If you are one of the lucky landowners, with either residential or commercial development possibilities, then you may be looking to sell. Although this can be a good idea, it’s important to be cautious.

The number of farmers and landowners being approached by developers continues to rise. We are carrying out increasing amounts of tax planning work to ensure our farming clients keep as much of the proceeds as possible.

This task may prove harder with possible future tax increases driven by the Treasury’s COVID19 related expenditure.

There is clearly an incentive to get on with the deal. Whether that be an option or promotion agreement, a hybrid or an outright sale or conditional sale. However, you should approach with caution and seek professional advice.

What should you consider when selling your land for development?

There are many things that you need to take into consideration when thinking about selling land for development potential. You should always seek the advice of a tax professional to ensure you are in the best tax position, and making use of all your tax allowances and reliefs. We have put together a list of key points that you need to be aware of when you think about selling your land below.

Capital Gains Tax vs Income Tax

Unless the land is in a corporate structure where the rate of Corporation Tax is currently 19%, do not enter into a build or development deal to ‘earn-out’ a profit. HMRC may challenge that you have entered into a business. If so, they will seek to tax your proceeds at the higher Income Tax rate, as opposed to the headline Capital Gains Tax rate of only 20%.

Tax freezer clauses

These have never been more important as the potential for tax increases in the future become a higher possibility, to help pay for the government covid support. It is recommended that you should write into the contract that if rates of Capital Gains Tax increase by way of future legislative changes, (e.g. the government decides to put the rate up) then the cost is passed on by way of increased proceeds for the sale of the land.

Consider the Option to Tax your land

If you need to recover large amounts of VAT (typically on promoter’s fees) then you will need to ‘Opt to Tax’ your land well before completion. This adds VAT to your land sale but means you can recover associated input VAT. You will need a contract that allows you to do this or it will become expensive. Often developers dislike this as they have to pay Stamp Duty Land Tax on the gross of VAT price.

Know the contract date and keep your advisers informed

Make sure you know when this is. For tax purposes, it is when the contract becomes unconditional and not necessarily at completion. Make sure your tax adviser is kept informed otherwise well-structured tax planning may fall at the last hurdle. This is particularly important when claims for Entrepreneurs’ Relief (now known as Business Asset Disposal Relief) and Rollover Relief are involved.

Deferred payments

Remember that the tax point is upon unconditional contract. Deferred monies received, perhaps in annual instalments, will be taxed before you receive them. Make sure you receive enough money, early enough, to pay the tax.

You should keep farming the land right up to the sale, even if the crop may not be harvested. Evidence such as photographs, cropping plans and invoices should be kept to record the activity taking place on the ground. It’s important to keep this sort of evidence and as it’s key to robust tax relief claims.

Ellacotts can ensure you sell your land in the most tax-efficient way

These are only a few points that you need to consider if you have land with development potential. Depending on your specific situation, there may well be more. Selling and developing land is a complicated process and professional advice from our expert team could mean a huge difference in the tax you pay.

Speak to your normal Ellacotts contact or Helen King on hking@ellacotts.co.uk or 01295 250401 for more advice on the tax implications of selling your land to developers.

Further reading on tax issues with land development

Watch our 30-minute free webinar on what to be aware of when you have a land development project here.

Read our blog about claiming a VAT refund if you build a home