02 March 2015 | Online since 2003



12 February 2014|Finance,News,Property News

Beware tax burden on planning uplift


Landowners are increasingly benefiting from development uplift in land values – but must plan carefully to avoid hefty tax bills.

“The past 18 months have seen a flurry of farmers looking at developing land, following the radical change in planning rules in favour of development,” says Neil Cox, senior rural services manager at accountant Old Mill. “This, combined with delays among many local authorities to complete their Local Development Plan, means a number of parcels of land that previously would not have been identified for development have successfully secured planning permission.”

However, even where the farmer does not intend to seek planning permission, land that is suitable for development could carry a ‘Hope Value’. “This would boost values significantly above agricultural levels, triggering a substantial capital gain upon gift or sale of the land.”

While Capital Gains Tax (CGT) can sometimes be deferred, Hope Values can be more troublesome if not recognised during a farmer’s lifetime, potentially resulting in a hefty Inheritance Tax (IHT) burden. “Beneficiaries could end up paying 40% in IHT, as Hope Values are not eligible for Agricultural Property Relief,” says Mr Cox. “Fortunately, advance tax planning can avoid this problem in many circumstances.”

It is also increasingly commonplace - particularly in the case of renewable energy projects - for a landowner to enter into either an Option Agreement or a Promotion Agreement several years in advance of actually selling their land to a developer.

“However, there are some key CGT, IHT and VAT issues around the way arrangements are structured, which could cost landowners hundreds of thousands of pounds in the long term if correct advice is not taken.”

Under an Option Agreement the landowner agrees to sell the land for an agreed price at some point in the future, if called upon to do so by the buyer. Options are normally exercised only on the proviso that planning permission is obtained within a specified time frame, says Mr Cox. “This is generally a capital disposal, with the gain being charged to CGT.”

A Promotion Agreement is an arrangement under which an agent works with a landowner to maximise the land value in return for a percentage of the ultimate profits on sale to a developer. “The tax treatment on the resulting proceeds can differ substantially, depending on the precise nature and wording of the agreement, and there are pitfalls for the unwary,” he adds.

“In the worst case scenario, the profit could be treated as a trading transaction and charged to Income Tax at up to 45%, with the added liability of National Insurance contributions. Alternatively, it may be charged to CGT at slightly more palatable rates of up to 28%.”

Depending on what the asset has been used for during the landowner’s period of ownership, Entrepreneurs’ Relief may be available to reduce the rate of CGT to 10%, says Mr Cox. “The VAT implications of such transactions are also very complex, and can differ according to the nature of arrangement.

“Considering the substantial values associated with development land, and the fundamental importance in the detail of the legal agreements entered into, the difference between a 45% rate of tax and 28%, or even 10%, is significant, and highlights the importance of planning as early on in the process as possible.”

Download



Comments


No comments posted yet. Be the first to post a comment

To post comment without approval login or register

Display name

Please enter your name

Email (optional)
Comment

Please enter your comment

Post Comment

Your comment submitted successfully.Please wait for admin approval.

Some error on your process.Please try one more time.



Jobs


26 February 2015
Farm Assistant
Participating in the day-to-day running of the farm - Keeping the farm yard clean and tidy at all times - Being a tour guide ...

16 February 2015
Livestock Coordinator
Support agriculture teams with producer events if required. This role will report directly to the UK Agriculture Director....

25 February 2015
Tractor Driver
Previous experience on having undertaken such work would be preferred or alternatively background in agriculture....

24 February 2015
Energy Lawyer
Some of our headline projects include the Seagreen Round 3 offshore wind farm, the UK's first deep geothermal project, nuclea...

24 February 2015
Front of House
Experience is preferred. Duties include serving customers with drinks, taking food orders, serving food to tables, clearing p...




Top stories you may have missed
2 February 2015 | Arable
Is EU membership damaging UK farming?

Is EU membership damaging UK farming?

Membership of the EU is damaging the British farming industry, according to...


29 January 2015 | Machinery and Equipment
Drones 'rapidly changing' agriculture

Drones 'rapidly changing' agriculture

BASIS has launched an accreditation for pilots of Unmanned Aerial Systems (...


23 January 2015 | Arable
UK wheat yields have potential to double

UK wheat yields have potential to double

UK wheat yields have theoretical potential to more than double over the nex...


23 January 2015 | Machinery and Equipment
Crowds flock to LAMMA 2015

Crowds flock to LAMMA 2015

Britain’s farmers flocked to Peterborough for the first day of LAMMA’15 to ...


22 January 2015 | Cattle
Don't blame supermarkets for milk crisis...

Don't blame supermarkets for milk crisis...

The crisis in the dairy industry is not the fault of supermarkets, accordin...


16 January 2015 | CLA
Families affected by HS2 face 'major wor...

Families affected by HS2 face 'major wor...

Transport Minister Baroness Kramer visited three rural businesses in Cheshi...


16 January 2015 | Machinery and Equipment
John Deere unveil new 6R tractor range

John Deere unveil new 6R tractor range

Spearheading the John Deere range of mid-size tractors from Mannheim, the n...


14 January 2015 | Animal Health
Monthly TB checks more effective than ba...

Monthly TB checks more effective than ba...

Regular testing for bovine TB could significantly reduce the number of infe...


12 January 2015 | News
Government regulations hampering UK agri...

Government regulations hampering UK agri...

Single-issue policy-making threatens to hamper, not help, the progress of U...


8 January 2015 | Cattle
2015: The year ahead for the beef market

2015: The year ahead for the beef market

2014 has been a “rocky old year” for the beef industry but better prices ar...