Capital gains tax planning for development land

Over the last year we have seen ever more clients disposing of land for development, whether alone or in conjunction with neighbouring landowners.

A sale of development land can provide a considerable windfall, but it is important to ensure that appropriate planning is undertaken in advance of any sale, to mitigate any capital gains tax (CGT) that will arise.

If Entrepreneurs’ Relief can be claimed on a disposal, it will reduce the rate of CGT payable from 20% to 10% on the first £10 million of gains. The relief is not ordinarily available on the disposal of part of a landholding used by a business, but only on the disposal either of an entire business or of the assets of a business that is being wound up. Thus, if only part of a landholding is going to be disposed of, restructuring may be required to set up a separate business on the land being sold.

The relief requires the actual business that is sold (not some precursor) to have been running for twelve months prior to the sale, so it is important that any restructuring is done well in advance of any prospective sale. If the land is held in trust the relief can still be claimed, but in addition to ensuring the business is properly structured it may also be necessary to restructure the terms of the trust.

The CGT position becomes considerably more complicated if a potential development site encompasses land owned by more than one person. If there is a joint venture or participation agreement between the different owners, considerable care must be taken to ensure that one owner is not hit with a substantial CGT bill – without receiving any cash themselves – on the sale of another owner’s part of the site. Carefully structured land pooling arrangements can avoid these difficulties. Again, it is important to start planning early, to allow time to obtain the agreement of all parties.