Solving the double taxation conundrum
Tax implications are always a concern for landowners wishing to sell their land for development, with some entering into a land pooling trust to avoid double taxation.
However, there are certain things that must be taken into account when considering this option.
When landowners group land together, without creating a trust, they may liable to pay both Capital Gains Tax (CGT) and Income Tax if the land is sold in parcels (not as a whole). The owner of the land sold must pay CGT, calculated according to the value increase of the land sold, and the other landowners must then pay income tax on their share of the profits. This double taxation can be a costly issue.
Land pooling trusts
In simple terms, a land pooling trust involves the creation of one entity made up of individual land packets. The trustees can then sell the land as a collective, with each person having an interest in the entirety of the land. This can be a tax-efficient approach, especially if the land is due to be developed, as only CGT must be paid.
Although land pooling trusts bring tax benefits, they aren’t always the right choice for every landowner. For a trust to work successfully, the landowners must be able to make important decisions without conflict getting in the way. As such, for those who don’t see eye-to-eye with their fellow landowners, a land pooling trust might not be the most suitable option.
An alternative is a detailed collaboration agreement, tied in with prior approval from HMRC. This is not a quick alternative as all the landowners have to agree to the terms (which may not solve any inter-landowner issues) and HMRC have to be consulted but it is solely a contractual arrangement, not bringing the parties into a trust. Those involved keep interest in their land alone, meaning the land isn’t sold collectively and both CGT and income tax must be paid. However, if HMRC approve the collaboration agreement in advance of any land sales, then the double taxation element could be removed.
Structuring a land sale in the most tax efficient manner is not as simple as choosing the most popular route at the time. Over the years, there have been a variety of alternatives, ranging from option agreements to restrictive covenants; it is an ever-changing landscape.
By seeking advice from experts such as our property development experts, landowners can pick the right approach for them based on their individual needs.
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