10 Aug 2015 Compulsory purchase of land – What are the Capital Gains Tax Reliefs?
Where land is acquired by an authority as part of the compulsory purchase process this will trigger an unwelcome and involuntary Capital Gains Tax disposal by the landowner.
Fortunately reliefs are available to reduce the immediate Capital Gains Tax impact and this article outlines the Capital Gains Tax reliefs available to the landowner on such a disposal. But before discussing the reliefs, a little background will be helpful.
Background
The compensation package that is received by the landowner will comprise some, or all, of the following components:
- An amount for the land itself.
- An amount for severance (ie a fall in value of other land held by the person whose land is being compulsorily purchased).
- An amount for disturbance (eg loss of stock, temporary loss of profits, loss of goodwill, incidental expenses).
Consequently part of the compensation may not relate to the disposal of the land and the compensation should be apportioned between the various components to determine whether each is an income receipt (eg temporary loss of profits) or a capital receipt (eg the amount for the land itself).
It is only the capital receipts that are liable to Capital Gains Tax, and to which the available reliefs may apply, so it will be helpful for the agreement documentation to clearly set out the apportionments.
For Capital Gains Tax, the disposal date of land is normally the date sale contracts are exchanged. However, there may be no sale contract in a compulsory purchase and where this is the case the disposal date is the date the compensation is agreed. It may sometimes be beneficial to delay agreement until after the start of a new tax year.
So, what are the Capital Gains Tax reliefs that may be available to reduce the Capital Gains Tax impact of a compulsory purchase?
Small Part Disposals of Land
This relief applies to all disposals of a small area of land out of a larger holding of land. The relief is not limited to compulsory purchases.
The relief is available where the consideration for the part disposed does not exceed 20% of the market value of the holding prior to disposal and the total consideration for all land disposals in the same tax year does not exceed £20,000 (but part disposals to an authority with compulsory powers (see below) are not counted towards the £20,000 limit).
A claim for this relief means that there is no disposal for Capital Gains Tax and the consideration received is deducted from the base cost of the holding. If the consideration exceeds the base cost of the holding, the excess is a taxable gain.
Specific provisions deal with identifying the holding from which the part disposal takes place.
Part Disposal to Authority with Compulsory Powers
As the name indicates, this relief is restricted to a disposal of part of a holding of land to an authority exercising or having compulsory powers (or which could be so authorised). It is available where the consideration is small (not exceeding 5%) compared to the market value of the holding before the disposal and the landlord has taken no steps to dispose of, nor given any indication to anyone of their willingness to dispose of, any part of the holding.
In practice HMRC have ignored attempts to sell land more than three years before the compulsory acquisition and have generally treated £3,000 as small irrespective of the 5% limit, but these practices may change.
A claim for this relief means that there is no disposal for Capital Gains Tax and the consideration received is deducted from the base cost of the holding. If the consideration exceeds the base cost of the holding the excess is a taxable gain.
As with the previous relief, specific provisions deal with identifying the holding from which the part disposal takes place.
Rollover Relief on Compulsory Acquisition
Where land is disposed to an authority exercising or having compulsory powers (or which could be so authorised) and the landlord has taken no steps to dispose of, nor given any indication to anyone of their willingness to dispose of, any part of the holding, this relief may be available.
The relief may be claimed where the consideration is used to acquire other land during the period twelve months before and three years after the disposal, and where the replacement land is not a dwelling to which main residence relief would apply during the six years following the acquisition. A provisional claim to relief may be made before reinvestment takes place.
In practice HMRC have ignored attempts to sell land more than three years before the compulsory acquisition, but this practice may change.
Claiming this relief will mean that the disposal will be treated as being at “no gain / no loss” by reducing the consideration to a notional consideration with the consideration not used in computing the no gain / no loss disposal (the difference between the actual consideration and notional consideration) deducted from the acquisition cost of the new land.
Specific provisions apply where only part of the consideration is used to acquire new land.
This relief is wider than the business asset rollover relief detailed below, as the land does not have to have been used in the vendor’s trade.
Business Asset Rollover Relief
Although not specifically aimed at compulsory purchases, this valuable relief should be available to traders who are the subject of a compulsory purchase as an alternative to the reliefs above, particularly where suitable replacement land is in short supply or the trader wishes to diversify the existing business.
The relief is available where a trade disposes of qualifying assets that have been used only for the purposes of the trade throughout their ownership and the proceeds are used, during the period twelve months before and three years after the disposal, to acquire new qualifying assets that are immediately taken into use in the trade. The new assets must not be acquired wholly or partly for the purpose of realising a gain from their disposal.
The qualifying assets include:
– land and buildings occupied (and used) only for the purposes of a trade
– fixed plant or machinery which does not form part of a building
– goodwill
– payment entitlements under the basic payment scheme
The replacement asset does not need to be used in the same trade as the disposed asset and so can be used to diversify, for example into furnished holiday lets.
The ability to rollover into new buildings used in the trade can be especially attractive when it is difficult to acquire suitable replacement land.
A claim for this relief means the disposal will be at “no gain / no loss” and the gain on the disposal is deducted from the acquisition cost of the new qualifying asset.
Although the time limit for reinvesting ends three years after the disposal, HMRC has the power to allow a longer period in restricted circumstances.
The replacement asset(s) may be a wasting asset (for example, solar panels), or one that will become a wasting asset within ten years of the acquisition, in which case the gain is deferred for up to ten years, unless the replacement asset is itself replaced with a non-wasting asset.
More complex provisions apply to assets not used exclusively for the trade and where only a part of the proceeds is reinvested.
Conclusion
The reliefs discussed above are valuable, particularly where the area of land and hence the compensation are large, and it is worthwhile considering the tax position before entering into any agreement in case action needs to be taken to qualify for a particular relief or where the tax position may be a helpful bargaining point.
Other tax issues may also arise under a compulsory purchase, for example the availability of Inheritance Tax Agricultural Property Relief and Business Property Relief, which are outside the scope of this article, but on which landtax would be pleased to assist.
If you have any queries, please contact your usual consultant or Nick Abbott on 01993 886407 [email protected]