July 23, 2021

Article

Capital gains tax (CGT) is the tax paid on gains realised on the sale of assets such as land, buildings, dwellings, shares and other property. The rates of CGT are low compared to personal income tax rates with CGT rates on residential property 18% to 28% and all other property at 10% to 20%.

In July 2020, against the backdrop of Covid-19, and unpresented government support, Rishi Sunak asked the Office of Tax Simplification (OTS) to review CGT. They published their first report in November 2020 (see winter newsletter article - Recommended changes to Capital Gains Tax | Albert Goodman). On 20 May they released their second report.

The second report focuses on practical, technical and administrative issues and it covered a range of areas including getting divorced, main homes and running and investing in business. However, there was particular focus on land transactions. What was striking to me was the impact of lobbying by The CLA with many of the matters delivered by them to the OTS noted in their report. The CLA is the only named organisation in the report with reference to the CLAs recommendation for delivery of the ‘Rural Business Unit’. The main recommendations affecting landowners are:

1. The treatment of land used in a trade v land treated as investment

The report noted that land used in a trading business (farming) is often treated more favourably for tax purposes than land held for investment purposes (let land and property).

The report recognised the existing system has implications for modern farming businesses which are diversifying to maximise business opportunities. By diversifying, farming businesses jeopardise important CGT and IHT reliefs which are especially important to the sector to support longer term business investment, restructuring and succession.

The report went on to say ‘Some representatives of such farming businesses have been consistently arguing that the tax system should be modernised to help farmers to address these and other diversification issues. One suggested approach to such modernisation is presented by the Country Land & Business Association in their single ‘Rural Business Unit’.

The OTS made no specific recommendation on this although this is a step forward and they did recommend government consider how certain tax rules interact with policy aims.

2. Land use

The report referred to changes in land use such as those that may take place on entering Environmental Land Management schemes. It noted that these land use changes could jeopardise CGT reliefs.
The OTS recommended government review certain tax rules against environmental objectives to ensure they do not create different incentives and to coordinate effectively so that there are no unnecessary barriers to wider environmental policy aims.

3. Deferred proceeds

Proceeds from the sale of property can be received in different ways and sometimes they might be paid over several years. This often creates practical issues including upfront tax on cash that has not yet been received. This can distort commercial decision making.

The report recommends considering tax liabilities being due at the time the cash is received and preserving eligibility to reliefs at the time of sale. This would be hugely simpler for landowners selling, particularly development land.

4. Compulsory purchase and rollover relief

Owners of let land are not normally eligible to claim rollover relief on its sale. However, there are rules to allow the relief when land is compulsory purchased, assuming the land is replaced on a like for like basis – the gain on the sale of let land can then be rolled over but only into new land, not into new buildings on land already owned.
The relief rules specify that the relief will not be given in compulsory purchase situations where the landowner has shown a ‘willingness to sell’ in advance of the order. This causes issues with landowners concerned about entering early negotiations with a purchasing authority because they may jeopardise their relief.

Compensation is also often received for blight to neighbouring land by a development. As land has not been disposed the compulsory purchase legislation cannot be applied and it will not qualify for rollover relief.
The OTS noted the challenges for owners of farmland particularly since acquiring replacement neighbouring land can be difficult in the current land market. Further requiring a like for like basis has little economic rationale - the farming sector would benefit as much from new agricultural buildings on land already owned.

The OTS made the following recommendations:

  • Government should expand the rollover relief rules to free up owners of agricultural land to reinvest in more economically efficient improvements to or construction of buildings or to allow wider diversification investment.
  • Legislation should be expanded to allow the gain arising on the receipt of a compensation payment for the devaluing of land near to the compulsory purchase area to be rolled over.
  • The rollover time limit should be expanded to say five years.
    HMRC guidance on the ‘willingness to sell’ point should be clarified to give more certainty to owners of farmland in compulsory purchase situations. Or the point should be removed.

5. Land pooling

Often multiple landowners are involved in the assembly of land for development purposes. One way of assembling land is by land pooling. This involves the collaboration of landowners to provide a suitable area for development. The landowners then share in the proceeds of the sale of the pooled land. However, there are many CGT and stamp duty land tax issues of land pooling. As a result, it can be complex and expensive to put structures in place to avoid unnecessary tax charges. This leads to delays in bringing land forward for housing.

The OTS recommended that government should explore ways to make land assembly more tax neutral.

Overall, the second report has made some very positive recommendations for the farming and landowning sector. Immediate clarity is required regarding point 2 and we will wait in anticipation to see if point 1 is taken forward. The latter would hugely simplify the taxation of farms and estates providing transparency in planning for the future. The chancellor is required by the OTS legislation to respond to reports he has commissioned. Typically, responses are given in Budgets with the next one due in the autumn.

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