Tax planning for hope value of land
25th February 2014
Ben Carter See profile
With the value of agricultural land at an all time high, the hope value of such land cannot be ignored.
Hope value describes the market value of land over and above its agricultural value i.e. the development value. With such values often being well in excess of £100,000 per acre the potential tax liabilities cannot be ignored.
It is increasingly commonplace for a landowner to enter into either an Option Agreement or a Promotion Agreement over their land several years in advance of actually disposing of it to a developer.
Under an Option Agreement the landowner agrees to sell the land to the other party for an agreed price at some point in the future, normally on the proviso that planning permission is obtained within a specified time frame. A disposal under this type of arrangement is generally capital in nature with the gain being charged to Capital Gains Tax (CGT).
A Promotion Agreement is an arrangement in which an agent agrees to work with a landowner to maximise the value of their land in return for a percentage of the ultimate profits on sale to a developer. The tax treatment on the resulting proceeds can differ substantially depending on the nature of the arrangement and wording of any written agreements.
In the worst case scenario, the profit on sale could be treated as a trading transaction and charged to Income Tax at rates of up to 45%, with the added liability of National Insurance Contributions. Alternatively, the disposal may qualify as being capital in nature with the profit being charged to CGT at slightly more palatable rates of up to 28%.
Depending on what the asset has been used for during the landowner’s period of ownership, Entrepreneurs’ Relief may be available to reduce the rate of CGT to 10%.
The VAT implications of such transactions are also very complex and again can differ depending on the nature of arrangement adopted.
Considering the substantial values associated with development land, the difference between a 45% rate of tax and a 28%, or even 10%, rate is significant thus highlighting the importance of planning as early on in the process as possible.
For more information please contact your usual Old Mill contact.