Joint venture with Property Developer tax implications

[dotto]

My son and myself purchased a bungalow in January 2010 and subsequently obtained planning permission to build 2 houses on the site, with the bungalow remaining. A developer has put forward a joint venture proposal whereby a contract is drawn up stating that he agrees to purchase the plots within a set period, say 12 months. During this time he builds the two houses and hopefully sells them at which time, if I understand correctly, the money is paid to us for the plots and the transfer of land with the Land Registry takes place. He claims that if the houses are not sold, or not completed, during the time period stipulated, then the plots remain in our ownership, together with the houses. The developer has undertaken this type of project on several other occasions but seems unable to produce a draft contract for me to see in order for me to understand the process more clearly. I told him that my understanding is that disposing of the plots in this manner will incur capital gains tax but be says quite categorically that I am wrong. I am aware that I would have to sell both plots together, or plot 1 first (as plot 2 lies between our bungalow and plot 1) for the land to be sold as our garden (which it is) ie we would be unwise to sell only plot 2 in the middle, thereby rendering Plot 1 separate from our bungalow and becoming no longer our garden. The developer insists that the only person that can lose with this arrangement is himself. His other developments have been undertaken locally and I have been assured by one of the landowners involved that the arrangement worked well for them, but his solicitor drew up the contract and when asked he was unable to give us sight of this (may not have wanted to get involved). I shall take legal advice about the proposal but at this point am concerned about capital gains tax and hope you are able to help.

[mullet]

Do you live in the bungalow as your only or main residence? Are you married? If so, where does your wife live?
Does your son live in the bungalow as his only or main residence? Is he marred? If so, where does his wife live?
What is the area of the entire plot including the bungalow, garden and two building plots?

Here is the major pitfall - if ownership of the land does not pass to the builder until the new properties are built, then (assuming that all qualifying conditions are met to mean that relief is principally available - please answer questions above) private residence relief would not be available on the disposal of the two plots - because they would no longer be garden. What matters is the state and nature of the plots at your disposal date. If they are no longer garden or grounds then relief cannot be due. A building site is not garden/grounds.

But you also need to take one step back - is this an adventure in the nature of trade? Did you acquire the property with a view to development and profit? Determining the correct basis of charge isn't as simple as answering that one question, but if it transpires that this is a trading activity then forget CGT and possible exemptions - you would be liable to income tax and Class 4 NICs on the profit.

[dotto]

Thank you for responding. My son and I live in the bungalow and intend staying there, unless there is a change in our personal circumstances. We bought the property because we loved where it is and also saw its potential for further development although the general feeling was that we would never get planning permission. We have been lucky enough to be granted full planning permission and are now in the process of trying to sell the plots. I have never considered this as a 'trading' venture and we had hoped to get more interest from self builders, as the people occupying the new houses will be our neighbours. I agree with what you have said about the position of the land at the time it is transferred in that if there are houses on it, this can no longer be regarded as garden (the land would have had to have been transferred before any building was started). The developer refers to the proposed contract between us as a deferred sale for the land, but I can't see that HMRC would accept this'. Have you any thoughts regarding this "deferred sale/payment". I had decided not to proceed with his offer because of the capital gains tax but he insists we would not have this to pay. I agreed I would try and find out whether this is the case hence my query.

My thanks to you for your time.

[mullet]

The date of transfer for CGT purposes is the contract date rather than the completion date (as many might think). In a simple case with an unconditional contract it will be the date that the contract is signed/exchanged with some consideration passing. If the contract is conditional then the relevant date for CGT purposes is the date on which the final condition is satisfied.

As long as this is your only or main residence, the CGT-free route (as you have correctly established) is to sell the garden whilst it is still garden - before the turf is lifted, holes are dug or it is fenced off.

But is private residence relief available? Please answer the marriage and area questions.

[dotto]

Thank you again. I have concluded that the contract the developer refers to has conditions ie if the houses are not sold within a specified time, then the plots remain in our ownership along with the houses. If this situation happened we would have to sell the houses ourselves (unless we lived in them first) and would incur capital gains tax. If the developer built the houses and sold them within the specified period and the land was transferred into his name ie the deferred payment comes into play - would this incur capital gains tax. It may be that for him to pay for the plots, he has to receive the money from the house purchasers first; I am not sure how this would work as regards the transfer.

I am divorced and my son still lives at home, after ending a long term relationship - we purchased the bungalow jointly.

We have heavily invested in this property and do not want to involve ourselves in what could be a risky and complicated process. However, we have no other offers at the moment, although there has been interest, and thought it at least worth investigating.

Kind regards

[maths]

The bungalow was purchased in January 2010; on what dates were planning permission applied for and obtained?

[dotto]

We applied for pp in January 2011 and permission was granted in March 2011. Does this have relevance.

Thank you.

[Incredulum]

I am somewhat concerned about an individual purchasing a bungalow with a large garden and almost immediately after acquisition putting in for planning, and then hoping to sell off the bits CGT free.

I suggest that even if this is not a trading transaction - of which more later - then you fail under s222(1)(b) "land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to 0.5 of a hectare". I don't think you care about the garden at all, therefore I suggest falls completely outside the PPR exemption and full CGT applies.


Is this a trading transaction? I have a feeling that this is a question that would only be answered categorically by the courts. I suspect that one could get a "should" opinion in either direction. I suspect it would turn on the "reason for acquisition" point - and here I think the argument would be between "garden purchased incidentally with house" and "house purchased incidentally with garden".

[maths]

Sorry, forgot to respond.

Not sure we know the size of the grounds (will assume no more than 0.5 hectare)?

It seems to me HMRC have three grounds for attack in order to deny CGT treatment:

1. s224(3) applies ie acquisition of property partly with a view to realising a gain on sale.

2. the purchase and sale constitutes a trading activity.

3. the purchase and sale is an adventure in the nature of the trade.

Any or all of the above may apply as prima facie planning permission was applied for relatively quickly after purchase (and/or discussions with developer started even earlier?) suggesting that part of reason for purchase was to realise a gain from sale.