Building on someone else’s land – tax and inheritance issues

Recently we’ve worked on a number of projects with farming clients who have proposed building a new residential house, and one of the issues that has arisen is the location of the property.

In cases where a house is built on land owned by parents or jointly owned by siblings, while it shouldn’t cause any immediate day-to-day issues, it’s important to understand who actually owns the property.

Most people want the comfort and security of knowing they own their home, and in a number of cases we’ve come across, families had assumed that the person who paid for the house to be built owned it. But if the land on which the house stands is not owned by that person, or is jointly owned, it’s likely that the other landowners will hold an interest in the property.

In these situations, when the person who built the house dies, clarifying who will inherit those interests can be difficult; there can also be issues around Inheritance Tax if the house does not benefit from relief. Where all parties agree, the ownership position can be adjusted by transferring the house and the underlying land into the right person’s ownership. However, doing so could trigger significant tax liabilities, particularly Capital Gains Tax.

While we can work with clients to structure such transfers tax efficiently, the best advice is to think carefully about who is meant to own the house at the outset, before building starts. In most cases it will be more efficient to make an initial transfer of bare agricultural land, when the value could be low and tax reliefs could apply, rather than a transfer of the house.

Of course, tax is not the only consideration, and there may be other reasons why transferring the land to the intended party before building starts is not the best option. So it’s important to talk to your solicitor and your accountant at the planning stage, to determine whether changing ownership before building begins is the right thing to do.

If you have any concerns or queries regarding the tax implications of building a property, the Old Mill team can give you the advice and guidance you need.