Potential tax trap on land sales

Farmers and other landowners will often be approached by house builders seeking to buy their land for a new development.

Great care is needed to avoid unnecessary tax charges on this type of transaction. HMRC have recently updated their guidance on transactions in land clarifying that under certain circumstances some of the sale proceeds will be taxed as income rather than a capital gain. For individual landowners that could mean 45% income tax plus national insurance instead of just 28% capital gains tax.

For example, a landowner sells some land to a developer for £5 million plus 10% of any profit on the development over £6 million.  The initial £5 million is likely to fall into the capital gains regime.  However, if the profit on the project was £8 million then the landowner’s share of the additional income would be £200,000 and this would be taxed as a trading profit.

The tax rules in this area are complex. If you are involved in such a deal contact us so we can advise on the best way of structuring the transaction.