Key Post: Capital gains tax on sale of development land

[aristotle]

I bought some land about 10 years ago for £5000.
I obtained outline planning permission for 4 building sites.
I have sold 3 of these building sites this year between April and September and have got about £43,000 in total from the sale off these sites.I have some expenses from planning permission and solicitors fees of about £3000.
I also sold some agricultural land before April of this year for £3,500.

What is my worst case capital cains liability and is there anythinhg I can do to deduce this.

I plan to invest most off this money which I have got from the sale of the sites in the building of my own house which is under construction at the moment on a site which I have bought.I am doing
this to have a smaller mortgage.

How long do I have to pay this capital cgains tax before I would be charged interest.

 

[Tommy]

Re: Capital gains tax

Hi Aristotle

In order to calculate your exact Capital Gains Tax liability, I would need to know the following:

1. what area of land did you buy ten years ago?
2. Did the land have any obvious development value when you bought it?
3. what proportion of that area have you sold to date - in the £3,500 disposal pre-April 2001 and in the subsequent £43,000 disposals – and what proportion do you still own?

The purpose of these questions is to find out how much capital gains tax relief you will receive on your original £5,000 purchase. You may also be entitled to indexation relief on all or part of this cost. This means that all or part of the £5,000 original cost may be increased by multiplying by 1.384 if you bought the land in the 1989/90 tax year (ending 5/4/90) or by 1.328 if you bought it in 1990/91.

Basically your capital gains tax liability should be as follows:
Sales proceeds (£43,000)

Less sale costs (£ 3,000)

Less a percentage of original purchase cost (£5,000 x percentage?)

Less exemption (£740 for short 2001 tax year)
= Taxable Gain

Your tax liability is 20% of this figure

The amount of the liability should be between £6,500 and £7,852, depending on how much of the £5,000 original cost can be deducted and whether indexation relief is available.

There doesn’t appear to be much you can do to reduce it. Rollover relief (i.e. tax relief by buying another asset with the money) doesn’t apply to the proceeds of development land sales and, even if it did, you want to spent the money on your own home.

You will probably also have a tax liability on the £3,500 sale. If it was after 5th April last, then add it to the above £43,000 figure and calculate your tax accordingly.

If the sale was before 5th April 2001, then your tax liability should be calculated on the same basis as the above, except that the deductible percentage of the original purchase will change and also your annual exemption for that year is £1,000 (assuming you didn’t jointly own the property with someone else)

The tax is payable by 31st October following the end of the year in which you sold the property. The tax on the £43,000 disposals should be paid by 31st October 2002. If you made the £3,500 sale before 5th April 2001, the tax on that should be paid before 31st October 2001. This is a Self-Assessment tax – the onus is on you to make a return and pay the tax by the annual 31st October deadline regardless of whether or not you receive any communication from the Revenue.


Tommy

 

[amcloughlin]

capital gains tax

Tommy,

Is there not a risk that the transactions involve a trading income rather than a capital gain?

Aidan

 

[Tommy]

Re: capital gains tax

Hi Aidan,

There is a possiblity, depending on the circumstances of a particular case, that a sequence of transactions may indeed be deemed to form a "trade" and thus fall under the ambit of income tax on trading income rather than CGT on capital gains.

Whether this is so depends on the facts of each case. In the above situation, where the land has been owned for 10 years and, assuming there has been no other development land purchases or sales in the meantime, I am not convinced that much of a case could be made that the individual is actively "trading" as a developer. Still, it is a useful point, and one that people should be aware of. Thanks for raising it.



Tommy
www.mcgibney.com