Selling land for development – planning for tax

If selling non-residential land (for example, a field within your farm), it might appear sensible to “opt to tax” that land, allowing you to recover VAT charged to you by your lawyer and other advisors on their fees (perhaps you owe a fee to an agent who put together the sale, for example).

“Opting to tax” converts a sale from VAT exempt to standard rated for VAT purposes (meaning you need to charge your buyer VAT), but you might realise that the typical developer can recover any VAT they are charged on sale, making this nothing more than a brief cashflow issue. Opting to tax will increase the developer’s SDLT however (as SDLT is charged on the sale price and the VAT element of the price). Before deciding to opt to tax, it is worth seeing how much “input VAT” this will allow you to recover, and how much it will add to the developer’s SDLT bill. Typically, the decision to opt is based on which number is bigger, minimising overall tax leakage. If you have recently opted to tax before realising this, you might still be able to cancel it.

You are probably aware that SDLT is payable by the purchaser when buying land. If the land is not residential, the rate is broadly calculated as 5% of the sale price less £10,500. If the land is residential, the rate can be much higher (peaking at 19%). If you sell a company that holds land, however, the buyer merely pays stamp duty on shares instead, at a rate of 0.5%. If the sale price is high, stamp duty on shares is roughly 10x less than SDLT on non residential land. It might be tempting to buy a company that holds land as opposed to the land itself, on the basis you will replace an SDLT bill with a dramatically smaller stamp duty bill.

In this scenario, it is critical to remember to consider the “latent gain” (also known as the “pregnant gain”). This is the difference between what is paid for the company and what the company originally bought the land for (together with its capital enhancement expenditure and certain other costs). To give an example, say you (a developer) have been offered the chance to either buy a development site for £10m, or the company that holds a development site for £10m. In both cases you obtain the land, but the first triggers £489,500 SDLT, the second triggers £50,000 stamp duty. What if that company acquired the land 25 years ago for £1m however. Say you develop the land for £7m and sell the developed plots for £20m. If you bought land, your gain is roughly £2.5m (sale price less purchase price, development cost and SDLT cost). You pay roughly £625k corporation tax and make profit a little under £1.9m. If you bought the company, your taxable gain is £12m (£20m less £7m development costs and £1m purchase price for the land – the cash paid for the shares in the company gets no relief). You pay roughly £3m corporation tax.

An initial drive to save transaction fees has meant you make an overall loss on the development if you buy the company, as opposed to a seven figure profit if you buy the land.

Overage broadly can help sellers when pricing a sale. It provides for a further top up payment in certain situations. For example, it might provide for the buyer to pay the seller a further £10,000 for every house above 50 the developer builds.

The VAT consequences are not always obvious, however. If the land was originally an opted field, the buyer might have paid VAT. The VAT treatment of overage is assessed at the point the overage is triggered however. If the land is residential at that time (as in the scenario in the paragraph above), the seller’s option to tax will not be effective any more, and the overage will not incur VAT. As a seller’s ability to recover input VAT is based on whether or not they charge VAT on sale, this can lead to an unexpected clawback of input VAT. Could the overage clause be amended to trigger a payment at a time the land is not residential instead?

Most of the time it is obvious when SDLT is triggered. Buy a house, pay SDLT on the cash paid within 14 days of completion. SDLT can be more complicated however. Developers might go onto the land for a variety of reasons between exchange and completion. If that occupation amounts to possession of substantially the whole of the land, SDLT is triggered in advance of completion.

This might sound like a bad thing, and is easy to miss (leading to interest and penalties). It might lead to some concerns around what is possession and whether it is of substantially the whole of the property (as a rough guide, starting to develop properties typically amounts to substantial possession. Entering a small fraction of the site to lay a sewage pipe likely won’t).

Often it can be a good thing, however, as, while it accelerates the SDLT date, it also prevents the works the developer carries out before completion attracting SDLT.

Subject to various reliefs, SDLT is charged on the consideration the buyer gives, and consideration can take many forms. A developer might agree to carry out building work for a seller (for example), if such a deal is struck the market value of the work attracts SDLT (in addition to any cash). Two parties might exchange land with each other, in which case both parties will incur SDLT (assuming the land is sufficiently valuable). The developer paying seller costs incurs SDLT. There are reliefs, however, provided an issue is identified in advance, planning can sometimes improve the tax treatment, or at least ensure all parties enter into the transaction knowing the consequences of what they have committed to.