The general rule for land sold for consideration is that the gain on disposal would be subject to capital gains tax (CGT). This is regardless of whether the consideration is in cash or not and whether the consideration is unascertainable and received in the future.
For the property to be classified as a capital asset, it would need to be acquired for investment purposes and, any increase in value, because of a market revaluation or from enhancement work, should not constitute a trade.
When the transaction is luckily considered in nature as trading, there are anti-avoidance provisions that treat the amount of any gain received in the tax year as trading income instead of capital gain. The regime only applies for income tax purposes and therefore no Class 2 or Class 4 NIC is payable.
One of the conditions for the provisions to apply is that the land must be acquired and/or developed with the main object of realising a gain from disposing of all or part of the land.
The legislation was implemented to expose artificial structure of a trade in land/developing land and ensure that the taxation of property developers, directly, and/or landlords indirectly, was fair.
One example is when a farmer sells land to a developer and receives as part of consideration a percentage of profit from the developer’s future disposal. Although the farmer is not involved directly in any enhancement activities, the profit on subsequent disposal meets the condition of the provision above.
The farmer would be initially subject to CGT on disposal of the land for its market value at the date the land was transferred to the developer, and then subject to any income tax on the additional profit from the second disposal (calculated as the difference of total profit minus the original capital gain).
The legislation would also apply when the owner sells shares in a company that holds the land and the gain realised on disposal accounts for more than 50% in value from the land.
Matteo Zaccagni
