Landowners can get significant benefits by working together to sell their plots, but Alex Barnes warns that the advantages can be offset by tax consequences
Landowners looking to sell land often come together to increase the overall plot size and development potential of their land, with a view to maximising the possible gains available on the disposal of it. Time and again, however, tax issues become a major headache.
Landowners working together as part of a contractual collaboration agreement often face being over-taxed as well as the risk of double taxation. This is particularly the case where landowners holding their land as an investment dispose of it in tranches and share the proceeds between them.
A taxing problem
The issue is that an individual landowner disposing of land will be subject to capital gains tax (“CGT”) on the full amount of the proceeds of sale received by him/her, regardless of the fact that a proportion of these proceeds are shared with the other landowners. The other landowners will also be subject to CGT on the share of proceeds received by them (so double taxation on these sums). On the basis that those other landowners’ rights to receive such share of proceeds arise from the collaboration agreement, these payments typically have no tax base cost. This means that the entire amount received by the other landowners will be subject to CGT.
Are joint ventures a solution?
While there is usually no easy solution to the problem, the landowners could establish a joint venture vehicle (“JVV”) or a trust, but this will typically lead to tax leakage and tax charges for the landowners when they may have no proceeds with which to pay the tax.
A JVV or a trust would overcome the double CGT issue referred to above, as the proceeds from the sale would not be shared by the landowners but would instead be distributed by the trustees or the relevant JVV to the landowners according to the trust arrangements, their shareholdings or their partnership interests.
However, using a JVV is unlikely to be a good idea for certain landowners, particularly some non-taxpayers. Using a company can often create a layer of tax that would not otherwise have existed and even using a partnership, which is typically tax transparent, can cause issues if HM Revenue & Customs deems the partnership to be carrying on a trading activity (namely, trading in land, having acquired the relevant land with a view to selling it). If a partnership in which a charity is a partner is deemed to be trading, this would result in the charity’s profits becoming taxable trading profits, for which no charitable tax exemption is available.
Other non-tax issues concerning JVVs would need to be considered as well – for example, the not insignificant cost of setting up and running the vehicle.
What are the other options?
If the landowners do not want a JVV, there are a few other options that could be considered – but again, none of them is particularly straightforward and some will work only in particular circumstances.
Loans to landowners might avoid the double CGT issue, but this is unlikely to overcome the problem of landowners becoming subject to tax on the entirety of the sums they receive from the sale of their phase of the land. Landowners would need to make sure they had sufficient proceeds or other resources from which to satisfy their CGT liability.
Another option would be very much dependent on the co‑operation of the developer and the facts of the transaction. It would require the developer, when acquiring individual phases, to acquire a parcel of land from each of the other landowners (even if outside the particular phase required by the developer). This should avoid any sharing of proceeds and ensure that each landowner is subject only to tax on the sums actually received and retained by them. However, such a solution would only ever work if there is one developer ultimately acquiring all of the landowners’ land; otherwise, arrangements could become very complex and the values attributed to the individual parcels (sold outside the relevant phase disposed of) would need to be carefully considered.
A final alternative might be for a landowner selling his phase to acquire a parcel of land from the other landowners yet to dispose of their land. This would be repeated for each phase until the last one is sold. There should be no double CGT in this scenario but the landowner selling his phase would, however, still be subject to CGT on the sum received by him, with no tax deduction for the sums spent acquiring land from the other landowners. The other landowners will be subject to CGT on the sums received by them for the sale of their parcels but this will take into account their base cost in the parcels sold. Again, this route would be complicated and it is likely to create some tax leakage – however, this should be less than a double CGT charge.
Tax planning
Given the pitfalls of collaboration agreements, it is essential at the beginning of every project to understand whether the respective land is to be sold in phases and whether the proceeds are to be shared between the landowners. If this is intended, then the tax status of the landowners and their objectives must be analysed carefully and appropriate planning put in place to mitigate the potential tax issues.
Alex Barnes is a partner at Irwin Mitchell LLP
