Q. What are the top tax issues which a landowner has to consider when entering into any collaboration agreement with other landowners? A1: The landowner may be regarded as triggering a disposal of their land for tax purposes which could result in a Capital Gains Tax and Stamp Duty Land Tax liability without any cash proceeds to pay the tax. A2: The owner of the land whose land is sold can face Capital Gains Tax on the entire amount of the sale proceeds even though part of the sale proceeds have to be split between the other collaborating landowners. A3: The landowners who receive a percentage of the sale proceeds from land which is not theirs could also pay Capital Gains Tax on what they receive, resulting in a double tax liability on the same sale proceeds. A4: Great care is required in ensuring that the landowners are not viewed as trading in partnership together which could result in an income tax liability for the landowners at a maximum tax rate of 45% of the sale proceeds instead of a top rate of Capital Gains Tax of 20%. A5: Ensuring recovery of VAT on costs incurred in connection with the promotion of the land for development so that it doesn’t eat into the proceeds received by the landowners. A6: Preserving existing Inheritance Tax reliefs such as Business Property Relief or Agricultural Property which may be available in respect of the land so that a significant Inheritance Tax liability does not result if one of the landowners dies during the collaboration process.
Q. How can these tax issues be tackled? A: An effective approach to tackle these tax issues relies on:- • a detailed review of the drafting of the Collaboration Arrangement before it is finalised; • putting in place the right mechanism and structure to ensure that the way in which the sale proceeds are split does not trigger double taxation or impose taxation on landowners before sale proceeds are realised. Amongst the structures which are often considered include pooling trusts, cross options, restrictive covenants and special purpose vehicles; and • making appropriate VAT registrations and elections. Needless to say, this is very much a specialist area of taxation requiring advisers with a knowledge of a range of property related taxes such as Inheritance Tax, Stamp Duty Land Tax, VAT and Capital Gains Tax and an acute awareness of the legal issues.
Gavin Birchall is a Tax Director at Scrutton Bland and has a specialism in property and land based tax issues. Gavin has over 14 years experience as a solicitor advising land owners and businesses on a range of tax issues particularly in relation to property transactions and business succession and is an active member of the Stamp Taxes Practitioners Group. If you are thinking of selling land for development, or would like advice on any land related tax issues, contact Gavin on 01206 838 400 .
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