Changes to legislation will affect anyone with an interest in the development or sale of UK land or property, says Pras Patel
So what’s changed? Until July 2016, a non-resident company that carried on the trade of developing or dealing in UK land was not caught by the UK tax net unless it was carrying on a trade in the UK through a ‘permanent establishment’.
However, from 5 July last year, companies were subject to UK corporation tax in respect of trading profits arising from the sale of UK land, regardless of whether there is a UK permanent establishment and regardless of the residence of the entity.
Not 16 March 2016? Maybe! The anti-forestalling provisions apply where a person disposes of a relevant asset to an associated person (more on this later) between 16 March 2016 and 5 July 2016 and the company obtains a relevant tax advantage as a result of the disposal.
Are we caught? It depends on whether any of the conditions (see below) are met in respect of activities carried out for the purpose of dealing in or developing land. If any one or more of the conditions is met in this scenario then the project will be caught and the person will be deemed to have a trade of dealing in or developing land.
The conditions are as follows – see s517B ITA 2007 (individuals) or s356OB CTA 2010 (for companies):
- If the land or property was acquired with the intention to realise a profit/gain from its disposal.
- If the land/property was held as trading stock.
- If land was developed with the main or sole purpose of realising a profit or gain.
But this does not apply to a profit or gain so far as it would (apart from this provision) already be brought into account as income in calculating profits for income tax or corporation tax purposes.
Anything else? Yes, it’s called Anti-fragmentation. Broadly speaking, if we would be caught by the conditions set out above but for the fact that someone else provided, say, the finance for the project, then we would still be caught if that someone else was an associated person. The definitions of terms such as ‘associated’ and ‘relevant contributions’ can be heavy going so the guidance at s356OT CTA 10 and s517U ITA 2007 will necessarily need to be read. There is also an anti-enveloping measure so that selling shares in a property holding company are likely to be looked at very closely by HMRC too.
Any exemptions? Yes, if the gain is covered by PPR relief then this element of the gain will not be caught, including any portion of a gain attributable to the period before the intention to develop, so the disposal would still be subject to capital gains tax only.
In conclusion, if UK land is held for a trading purpose then its disposal will be treated as income for tax purposes rather than capital. It is widely expected that we will increasingly see HMRC seek to apply these rules in the coming years.
- Pras Patel is CronerTaxwise Tax Consultant. For further information see www.cronertaxwise.com
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