Capital gains tax and compulsory purchase
11 Jul 2019
With policymakers being urged “not to lose sight” of the benefits the HS2 project will bring to the UK, more and more land is being taken under compulsory purchase orders. This can result in the payment of significant sums to landowners whose land is affected, but it is not necessarily all good news.
The issues arising from compulsory purchase are numerous, ranging from the impact on land values near the route to the practicalities of the day-to-day running of a land-based business on earmarked land.
Capital gains tax on payments for property taken
A disposal of land will usually give rise to a capital gains tax (CGT) liability. For all non-corporate owners, this will be charged at 20% or 28% (non-residential property vs residential property) of the difference between the capital payment received and the acquisition cost of the land, or the March 1982 market value of that land if it was acquired before that date.
There are helpful statutory provisions that remove an immediate CGT liability, provided the sums received under the compulsory purchase order are re-invested into other land and property, or the sums involved are below certain limits.
If the proceeds from all land sales in the tax year are below £20,000 and represent less than 20% of the market value of the land before the part disposal, the proceeds can be deducted from the base value, so there is no immediate tax liability.
Where the proceeds exceed these limits, the rollover relief provisions helpfully prevent an immediate charge to CGT arising. Instead the gain is deferred by reducing the base cost of the newly acquired land. There are conditions, including a time limit and a restriction on the nature of the new asset. In particular:
- Re-investment must be made within a four-year window, starting one year before the sale and ending three years after it; and
- Relief is only available when the proceeds are rolled into the purchase of other land and property.
The nature of the compensation: capital vs income
The compulsory purchase payment may extend to compensating the landowner for any permanent reduction in the value of land retained, for example where a parcel of land is severed from the main farm holding. This payment is likely to be capital in nature and available for roll over relief where the conditions are met.
However, there will be situations where land is only temporarily lost from normal farming operations, eg a construction team needs land for a site office, equipment pound, or for storage. Receipts for these payments are more likely to be income in nature and will therefore be subject to income tax rather than CGT.
The price of agricultural land has soared over the last decade and it may be difficult for those impacted to find replacement land at an affordable price in the timescale permitted, particularly land close to existing holdings. We understand that HMRC often takes a pragmatic approach and does have discretion to extend the four year re-investment timeframe if appropriate land cannot be found.
The farmer will need to consider how the farm will operate after the disposal, especially if the reduced acreage places pressure on covering the fixed costs, or if there are pockets of land severed from the main holding, which are then costlier to use.