We often have clients who are approached by developers to purchase their land. This could be because they are looking to develop on the site straight away or they may wish to do so in the future.
It is necessary to consider the tax issues which can arise for such clients. The first issue to address is whether the land they own has increased in value. This could be as a result of being approached by a developer, or perhaps they own land where their neighbour has recently sold land for development.
‘Hope’ or ‘development’ value can result in a potentially increased inheritance tax liability for their estate. It could also result in the loss of the main residence nil rate band which would potentially provide combined relief of £350,000 in 2020/21 if the estate’s value increases beyond £2,000,000.
In view of the potential increase in value and possible reduction in reliefs it could make sense for individuals to give away some or all of the current value and potential development value with the effect that any future enhancement of the value will completely fall outside of their estate.
Capital Gains Tax (CGT)
The gift of the land itself will be a disposal for CGT purposes with the ‘sales proceeds’ being equal to the current market value of the land. This means that the recipient of the land will have a base cost equal to the market value at that time meaning only the increase in value from this point will be subject to future CGT for them unless an election is possible to holdover the gain arising which could be the case if the property or land has been used in a trade carried on by the individual or a company which is his ‘personal company. Holdover may also be possible if the land is used for agricultural purposes. In these circumstances the rolled over gain will become taxable when the land is ultimately disposed of.
If the land was the individual’s principal residence or part of its garden then it may be possible to claim principle private residence relief which would exempt the gain from CGT. However this relief is only fully available if the land being disposed of is within the ‘permitted area’. This is usually a maximum of 0.5 hectares but can be larger if the size and character of the house means that a larger area is required for the reasonable enjoyment of it as a residence’. The land will usually have to be used as part of the property’s garden and, therefore a field at the bottom of the garden fenced off, or separate areas used as stables and a paddock may not be included in which case full CGT relief would not be available.
If the land were to be transferred into trust for a number of individuals’ benefit (say, the children and grandchildren of the property owner) then hold-over relief should also be available. It would be necessary for the value being transferred to be within the inheritance tax nil rate band as otherwise an immediate charge to inheritance tax would arise unless the property is eligible for business or agricultural property relief.
Inheritance tax (IHT)
An outright gift to an individual is a potentially exempt transfer. Therefore, providing the donor survives seven years from the date of the gift then no inheritance tax will be payable on their death. If they die within a seven year period then taper relief may be available to reduce any IHT payable on the gift.
A gift to a trust is a chargeable lifetime transfer). Any value transferred in excess of any previously unused nil rate band (currently £325,000 per person) will be subject to a lifetime IHT charge at 20%.
Depending on how the asset has been used by the donor it may be possible to claim agricultural property relief or business property relief for IHT purposes in which case greater values could be transferred into trust without creating a lifetime charge to IHT.
It is important to remember that if a death occurs within seven years of a gift which qualified for agricultural or business property relief these qualifications will still need to be satisfied at the point of death to avoid the relief being clawed back.
It is also important to note that if the individual lives in the property being gifted and if they continue to live in the property after the gift this may result in the gift being ineffective for IHT purposes such that it will remain in their estate. To overcome this it may be necessary for them to pay a market rate of rent for their occupancy.
Stamp Duty Land Tax (SDLT)
Where land which is not subject to a charge is gifted to an individual or a trust then no SDLT should arise. However, where the donor wishes to gift land which is subject to a mortgage SDLT can arise. This is because if the land is being gifted with the debt attached and, therefore, the recipient assumes the liability, then the assumption of that debt is regarded as consideration for SDLT purposes.
Value Added Tax (VAT)
While VAT will not normally have application to the sale or gift of a residential property or part thereof, there may be VAT implications where land has been used in or for a business.
Issue to be considered would include:
- If substantial amounts have been expended on the property within the previous ten years there could be a claw back of VAT which has been recovered on such expenditure.
- If the property is ‘opted’ for VAT there will be a requirement to account for VAT on the value of the gift or subsequent sale.
- If substantial costs are being incurred prior to the disposal of the property consideration should be given to opting the property to allow the VAT on the costs to be recovered. This needs to be weighed against the purchaser’s ability to recover the VAT and the additional SDLT he will suffer as this is charged on the VAT element of any sales proceeds.
Use of Trusts
Although trusts can have a number of tax and other benefits when created they do come with their own tax consequences. It is, therefore, important to note that if a trust is used there could potentially be further IHT liabilities every 10 years or when the capital is distributed to the beneficiaries. This will depend on a number of factors including the value and nature of the assets held and the type of trust being used.
Whenever land is being sold for development purposes, it is important to consider the anti-avoidance provisions which can apply to land being developed, as these can result in a charge to income tax on all or part of the gain on the ultimate sale of the land for development. Particular care should be taken where arrangements include overage or profit sharing arrangements.
For more information please contact Richard Harvey
t: 01245 254233