Option 1 – Purchase the land outright from the farmer.
Option 2 – Developer acquires the land for a lower value, but as an incentive will offer a percentage of the properties developed on land when they are sold at completion, but the farmer will not be involved in any of the trading activities.
He also has unused land doing nothing in a corporate structure so the has developer has offered to purchase the shares if planning permission is obtained, therefore could also explain the tax treatment?
Disposal of unused land held by the Farmer
Option 1 – Outright Purchase.
Your client would be subject to capital gains tax on the gain from a sale of land and the sale consideration would need to be brought into account at the date contract is made – the deemed disposal date.
Option 2 – Purchase with Later Incentive Payment.
Your client would be subject to capital gains tax on the sale of land to the developer. We must consider the second stage of sharing in the profits to decide whether this should be treated as additional, unascertainable consideration chargeable to CGT or whether it should be treated separately as a later revenue receipt. We must first consider whether the farmer was trading using the principles established by the badges of trade, but trading would seem unlikely here as the farmer will not be involved in the development activities.
We then need to consider whether the second phase of the transaction is going to be caught by the Transactions in Land anti-avoidance regime of Part 9A ITA 2007. See CG72850 which outlines the principles involved here.
S517B ITA 2007 states that a person who realises a profit or gain from a disposal of any land in the UK with any of the conditions in A to D are met, is subject to income tax on a deemed trading profit. See BIM60555 for a summary of these conditions.
It is unlikely that conditions A to C are going to be met as the farmer has not seemingly acquired the land to make a profit or held it as trading stock.
Condition ‘D’ is where the land has been developed with main purpose of selling it to make a profit. From the information provided, it would appear that this condition has been met as the farmer is making additional profits from the sale of plots after development. It does not matter who actually carries out the development.
If a transaction is caught by the legislation, ITA07 S517C states the chargeable person will be subject to income tax and not capital gains tax.
There is a useful exception to the charge in s517L ITA 2007 if part of the gain relates to a period before the intention was formed to develop the land – see BIM60650. This is an important exception and will mean that part of the right to participate in the development will generally still be chargeable to CGT at the date of sale but any excess, the development profit, will be charged to income tax on receipt.
Please note that this regime only applies for income tax purposes and so no Class 2 or Class 4 NIC is payable.
Business Asset Disposal Relief would appear to be unavailable on any capital gain under either option as your client is not selling part of a business, but simply an asset.
Land held in corporate structure
A disposal of shares is usually a capital transaction subject to CGT. However, we do again have to consider the transactions in land legislation.
S517D ITA 2007 brings a profit into the regime if a person realises a profit or gain from an asset that derives 50% in value from land with that person being party to, or concerned in, an arrangement to deal in or develop the land with aim of a profit.
The farmer will be selling shares in a company that holds the land and so seemingly meets the 50% value test. If planning permission is obtained, the developer will buy the shares to develop the land. However, is the farmer party to or concerned with an arrangement to develop the property? HMRC provide some guidance and examples at BIM60580 and BIM60575 which do not match the scenario you have here. Based on the HMRC guidance, it would seem that HMRC currently take the view that being party to, or concerned in, an arrangement to deal in or develop the land requires more than a simple outright sale of the shares in a company holding unused land. However, the history and purpose of the land acquisition should be reviewed.
Summary
The above is only a brief overview of the issues involved based on the information provided. It is important that you consider the precise facts involved to consider whether the transactions in land regime applies to specific transactions.
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