Development Land disposal = CGT or Income Tax ?

[simoncoles]

I am a joint owner in some land ( formerly a sports ground) which has just received consent for residential development which will result in a large profit for the three partners.
We have owned the land in excess of two years.

At purchase we sublet the site to a company for short term storage at a peppercorn rental as access was difficult.

The site was within a protected ( NO Development area), and initially we bought the site with a long term view to building an indoor sports and health club, subject to a 7 year waiting expectancy on planning , lobbying and appeals etc.

Just after purchase the local planning authority adopted a new town plan, and the site unexpectedly became a potential residential opportunity.
At the suggestion of the Local authority we submitted a residential application which has since been passed.

The question is:
Do we have CGT liability?
Is it a qualifying asset and thus could we get the full releif, i.e. the 10% payable rate?
Is it an income tax liability for the partners?

[King_Maker]

Difficult to call - my initial inclination is towards Income Tax.

So for an immediate sale :

1. No.

2. No (even with CGT treatment).

3. Yes.

I am sure there will be other views/comments.

[simoncoles]

Some additional info:

We are unlikely to build out ourselves, but are more likely to sell the site with the benefit of planning.

We may consider a JV.

The project was a one off with the partners involved and we were not an existing trading entity.

This was an excersise between friends albeit that all the partners have other individual property interests.

Expected profit / gain may be in excess of £1.0m per partner.

( How can I be certain that HMIT would class the profit as CGT or Income? This is critical when considering other options such as moving abroad, to a country with a lower Income Tax regime etc before disposal etc ???)

[Taxbar]

This maybe a capital gains transaction, although from the additional information it could also be treated as income. It needsto be looked at closely.

Moving abroad will not assist your income tax liability as this is taxed as income from UK land @up to 40%.

If Capital Gains tax, then you could avoid UK CGT by moving abroad, but you would have to spend a full 5 UK tax years outside the UK and you have to move somewhere that will not tax this gain.

Daniel Feingold
STP
info@stratax.co.uk

[King_Maker]

I got the impression that the OP would settle for a net profit of ~ £900,000, after deducting 10% for CGT?

[simoncoles]

yes, I would settle for 10% CGT and stay in UK.

I have also been advised that as we let the site to a UK Limited, but non quoted / listed company, that if these were a Qualifying company then in turn it makes the land a qualifying business assett and as such would get the fabled 10% rate..... whats your view??

I guess the last thing we want is HMIT taking the view its a CGT, non qualifying, and that they want the full 40%.

Its a real minefield, as most people are split 50/50 on whether the revenue will say its a CGT issue, or, as we intended to build a trading assett ( sports centre etc,) that we have a trading profit and as such a revenue issue.

if its CGT, we want to benefit from the solution above ( and get out at 10%)
If its a revenue issue I would happily consider the Gibralter Cat 2 residency route, but, the comment about income from UK land not qualifying is a whole new dilimna.

I guess first issue, is being 100% certain how HMIT will class the profit. is it a CGT or revenue issue, then we deal with the solutions..

intersting problem right !

[King_Maker]

"I have also been advised that as we let the site to a UK Limited, but non quoted / listed company, that if these were a Qualifying company then in turn it makes the land a qualifying business assett and as such would get the fabled 10% rate..... whats your view??" - simoncoles

Possibly. I had taken the view that "subletting for a peppercorn rent" probably did not qualify for BTR (Business Taper Relief), hence my negative reply in Answer 2. above. More details of the Lease(s) etc would be needed, IMHO.

Normally, if a transaction can be assessed to either Income Tax or CGT, then Income Tax takes precedence - so BTR would not be relevant.

[simoncoles]

the site was purchased with a long term view as it was not accessable, ( not landlocked, but no suitable road access, just a track...). As such it had little commercial value but we accepted a rent of £5kpa x 5 years for a company that was ensuring it had available storage use if needed.

We were happy as we did not expect ANY planning consents for maybe 7 years, as the site was listed to be included as protected area etc.

Given that in most circumstances HMIT would asses as Income tax in preference to CGT, should i consider the Gib Cat 2 residency or other such options, as the profit for me could be in excess of £1.m

[King_Maker]

£5000 p.a. is rather more than a peppercorn. :)

I think such a rent does help your cause for CGT treatment.

IMHO, emigration (for only financial reasons)can be very problematic. You need to choose your physical location very carefully. A place that was excellent for a holiday may pall when the stay is a longer one.

One useful aspect of the Gibraltar Cat 2 residency is there is no minimum stay in Gibraltar required.

[simoncoles]

youre right £5k is not peppercorn, but it is small in comparison to what we paid for the site and what it is now worth.
Having said that, it was a bonus at the time as the site was without suitable access.... we assumed dead money for a number of years...then got a planning bonus earlier than envisaged. ( Hence no tax planning in place !)

Given that scenario of letting the site, do you think we can argue we sold an asset that was a business asset and that we made a gain between the partners? in other words, because we rented it, to a qualifying company, regardless of rental level, is a trading asset subject to taper releif as we held it 2+ years ?

As for the Gib Cat 2 situation, its great that no requirement to stay in Gib, but, what if you spend more than the 183 days in another jurisdiction, does that mean they can lay claim to you? i.e UK, or Spain etc

Once i know as much as possible, i will chat with my partners, and maybe you can recomend a firm that can formally advise us etc..