Where a forced sale of land is made through a compulsory purchase order (CPO) then that land is subject to capital gains tax (CGT), as with other capital disposals. CGT is charged for non-corporate sellers at 20% for non-residential property, or 28% for residential property, on the gain arising, being the difference between the sale price and the acquisition cost (or the March 1982 market value if acquired before that date), and the cost of any capital improvement costs since acquisition (or March 1982 if acquired prior to that date).
But there are ways to defer this CGT liability, provided that the sums received under the CPO are reinvested into other land or property or are below certain limits.
Where the proceeds from all land sales in a single tax year are below £20,000, and the CPO compensation represents no more than 20% of the market value of the land before a part disposal, then the CPO proceeds received can instead be deducted from the base value of the larger land holding. In this way, the proceeds on a ‘small’ part disposal are only subject to CGT if and when the larger holding is sold in the future.
Where the compensation exceeds these limits, there is a form of rollover relief available that may prevent an immediate charge to CGT arising. Where the CPO compensation is reinvested into other land or property, the gain may instead be deducted from the base cost of newly acquired land or property. This can defer the tax arising on any gain until such point that the replacement land or property is sold in the future. Re-investment must be made within a four-year window starting one year before the sale and ending three years after it, the seller must not have taken any steps to make it known that they were prepared to sell, and the new investment must not include any dwelling that becomes the seller’s main residence.
The nature of the compensation may also vary. For instance, it could relate to compensating the landowner for a permanent reduction in the value of the land retained, by restricting access from one part of the farm to another for example. Such payments are likely to be capital in nature and could attract the aforementioned rollover relief, subject to satisfaction of the attached conditions. The compensation could be for a loss of profits. These payments are likely to be income in nature and will therefore be subject to income tax rather than CGT and would therefore not attract the above CGT reliefs.
“Major planned infrastructure projects could result in the payment of significant compensation sums to farmers and landowners. Although unexpected cash windfalls could be good news, a CPO may impact on surrounding land values, or can simply make the running of a farming unit more difficult by restricting access, impacting on viability or placing pressure on covering fixed costs.
“In terms of mitigating a CGT liability that can arise as a consequence of compulsory purchase, finding replacement land for the right price, in the right location and within the permitted timescale may also be difficult. HM Revenue & Customs has been known to take a pragmatic approach and has the discretion to extend the four-year re-investment timeframe.
“Whatever the circumstance it is likely to cause disruption and uncertainty and in the current climate, can be an additional distraction to running the farming or estate business.”