Transactions in Land – Updates in Finance Act 2016

The changes to the transactions in land legislation in the Finance Act 2016 will broaden the scope of the existing rules and may be relevant to an individual with an interest in the development or sale of property in the UK. Further details and background to the new legislation may be found here. Background The transactions in land rules seek to ensure that where land in the UK is held for the purpose of realising a gain/profit on disposal, any subsequent gain on the sale of such land is treated as income (as opposed to capital) and taxed at the higher income tax rates. The changes have been enacted as a part of a larger group of actions designed to prevent offshore structures being used to reduce the tax payable in the UK in respect of UK property developments. Despite this, the changes will be just as relevant to UK individuals and businesses, and will concern anyone with interest in the sale of UK property or the development of such property. Rules Gains (or losses) that have arisen due to the disposal of UK land are treated as trading income (or losses) where:

1. the main purpose (or one of the main purposes) of the acquisition/development of the land is the generation of profit or the realisation of a gain on disposal;
2. the land is held as trading stock i.e. property development company that holds a number of pieces of land/property for development/sale;
3. the main purpose (or one of the main purposes) of the acquisition of property, where the value of the property is derived from the land, is the generation of profit or the realisation of a gain on disposal i.e. shares in a property development company (see anti-enveloping below).

Application "Main purpose" rule The transactions in land rules will not apply where land is acquired for the purpose of generating long term rental income. Where the main purpose of holding the land changes during ownership, the profit on sale is apportioned according to the period it was held for long term rental purposes, and the period it was held for the purpose of generating a profit on sale. HMRC has published a number of useful examples in BIM60560. Anti-Fragmentation and Anti-Enveloping Rules While anti-enveloping measures existed prior to the changes, the new rules will have a wider application. Where the old legislation covered instances when a person disposed of a control over land, under the new rules minor shareholdings could be within the scope if 50% or more of the property’s value is derived from land. In order to be within the scope of the legislation, the person must be involved in the development or sale of the land for profit (the profit being on the property whose value is derived from the land) and not merely a passive investor. The anti-fragmentation rules cover when a person may (in the absence of specific provisions) seek to minimise or avoid the charge by paying fees to an associated person. When calculating the profits taxable by the landowner/developer under the transactions in lands rules, any profit made by the associated person is also included in the amount taxed under these rules.