Farmers and landowners could be faced with the prospect of compulsory purchase orders for their land and property for the development of housing and infrastructure projects under Labour.
In this article, accountant Saffery has issued some capital tax considerations for farmers and landowners regarding compulsory purchase orders and compensation payments, with respect to land.
The government has set a target of 1.5m new homes over the next five years coupled with relaxation of planning for brownfield sites and poor-quality greenbelt, more affordable housing, new towns and urban extensions.
Although reinstatement of Phase 2 of HS2 now looks unlikely, there is a pledge to improve rail connectivity across the north of England and an overturning of what has effectively been a ban on onshore wind development.
As part of the reforms to planning, there will also be changes to compulsory purchase compensation rules so that payments to affected farmers and landowners are “fair but not excessive.”
Following the Levelling Up and Regeneration Act 2023, from 30 April 2024, certain bodies may apply for a direction that hope value is ignored when calculating the compensation payable under a compulsory purchase order.
For major schemes, neighbouring farmers and landowners may also receive compensation payments as a result with the possible issue of capital taxes arising.
Capital Gains Tax (CGT)
A compulsory purchase triggers a disposal for CGT purposes, with CGT broadly charged on the difference between the payment received and the cost of the land.
The exact date of the disposal will be determined by the precise terms of the compulsory purchase order and whether any conditions are attached.
The receipt of a compensation payment may trigger a part disposal of the land in question for CGT purposes, with the cost of the land apportioned between the compensation payment and the value of the remaining interest in the land.
Any compensation for the temporary loss of profits will be treated as trading income.
For residential property, CGT will normally be at 24%, and for other types of land it will be at 20%, subject to the seller’s available annual exemption and basic rate band, together with any brought forward losses.
However, it may be possible to obtain relief from an immediate CGT liability provided the sums under the compulsory purchase order or compensation scheme are re-invested in other land or property.
Rollover relief may be available in these circumstances, but this is subject to conditions, for example, that re-investment must be made within one year prior to the sale or within three years after it, and the relief is only available where the proceeds are rolled into the purchase of other land or property.
The proceeds do not have to be reinvested into land to be used as a business asset, although any new property purchased must not be used as a main residence by the taxpayer.
Relief will be withdrawn if the use of the property changes to that of a main residence within a six-year time frame.
Will Leonard, director at Saffery, says there can be issues posed by reinvestment, with agricultural land being scarce.
"Although reports state that more agricultural land has come on stream this year, prices remain ‘resilient’, and those affected may not be able to find suitable land to purchase at an affordable price within the timescale.”
Small part disposals
Depending on the payment received, and the relative value of the original land holding as a whole, it may be possible to claim exemption from CGT under the small part disposals rules.
However, care must be taken to make sure the conditions are met, and the appropriate elections are made before the deadlines.
Business Asset Disposal Relief (BADR)
Where reinvestment in land or property is not possible, some planning ahead will determine whether a disposal of land will potentially qualify for BADR, which will bring the CGT rate down to 10%, subject to the lifetime cap.
Inheritance Tax (IHT)
Implications for IHT should also be considered since land used for agriculture or another business purpose may benefit from relief so that all or part of the value of the land is exempt from IHT.
However, the cash resulting from compulsory purchases or compensation payments will not benefit from relief unless the funds are reinvested into other qualifying assets.
Mr Leonard says: “It is important to look at the current ownership of land that might be affected and consider whether any changes should be made, or where cash received could be invested.
“It is also possible that where the land affected is currently used as security for a loan, banks may seek alternative security if the land value drops significantly due to parcels being compulsorily purchased, or because the land is blighted.
"This also may give rise to further IHT problems under the IHT debt relief restrictions," he explains.
