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Thanks for your question
If it was just your plot of land that had previously used as a garden there would be no capital gain position, (because its less than half an hectare) but as this involves you purchasing a neighbors portion of garden to add to your portion, and you have gained planning permission for the whole combined plot, this certain suggests an intent to make a profit from the position, and will not fall under the guise of having just enjoyed the garden as a garden throughout ownership until sale, and I would expect HMRC to view this as a capital gain position.
There is no harm writing to the Technical team at HMRC to ask for a ruling on this, but I fear they will advise that this profit will be liable to capital gains, although the first £10,600 will be exempt, the cost to purchase the neighbours plot, can be deducted from the profit, as can the costs to get planning permission and to sell (and a proportion of the purchase value when you initially purchased your property) so it may not be too large of a gain.
Thank you Sam... I guess the same would apply therefore if I decided to build the property myself..... I presume all costs associated with the build can be offset against the sale, and the net proceeds taxable.
I will contact HMRC to get a ruling.....could I have the address. Also, is there a more tax efficient way of doing this, ie creating a company? Is there a cheaper way of doing any of this?
Yes, thats right, any associated costs should you choose to build yourself would be deductible from the gain made.
The address will be your normal tax office, marking both the envelope and the letter for the attention of the Technical team but if you do not have this address to hand then
HM Revenue & CustomsPay As You EarnPO Box 1970LiverpoolL75 1WX
If you set up and other vehicle, then you will incur a capital gain just by transferring the land to the limited company, so somewhat defeats the point!
And furthermore if this is just a one off project then it cannot be treated as a trade and therefore not trade income, so you would not be permitted to set up a limited company, or treat this as trade income for income tax purposes.
Although there are benefits from being charged corporation tax rates within a limited company, the fact you suffer capital gains just through transferring the land (at market value with planning permission) into the company, and then lose out of the entitlement of the annual exemption allowance (as this is only awarded to individuals) and then defendant on your annul income, should suffer 40% -50% tax on the drawing out of dividends, makes this a very costly exercise and certainly less tax efficient then just having this treated as capital gains - where you get the benefit of the annual investment allowance, and top rate of capital gains tax is 28%
So this is not a viable solution I am afraid, nor having it treated as trade income for income tax purposes as a sole trader or partnership.
Really, its just the hope that you can argue with HMRC that as the land is less than half an hectare (and you do not build yourself) might you stand a small chance of a ruling that no taxable charge arises.
Do feel free to ask any further follow up questions, but if, in the meantime you could rate the level of service received, it would be appreciated, as this ensures I am paid. And any feedback and/or bonus are always most welcome,
..... just one last question, when would 28% capital gains tax be applicable instead of 18%?
This is when your usual annual income is either in excess of £42475 a year, then all the gain is liable to 28% capital gain tax.
But if your income is less than £42475 a year, then any unused basic rate band can allow that same amount of gain to be charged at 18% and any remaining gain at 28%
For example, an annual income of £30,000 would see £12,475 unused basic rate band.
So when considering a capital gain the first £12,475 of that gain would be charged at 18% and any further gain at 28%
Its still far better than income tax which sees any income over £42475 at 40% and any income in excess of £150,000 at 50%!
I feel better already! Thanks again for your helpful advice... I'll keep your details for the next batch of questions I no doubt will have in the future.
That would be wonderful, take care and enjoy the rest of the weekend
oh, just one last one .... and thinking outside the box... could the reduction in the value of my house apply as a "cost"? I think £100k is a figure which might be appropriate.
Your too have a good weekend, and thanks for working on a Sunday.
No, I am afraid not - as
1) Even if this would be permitted, then this would affect the sale of the house not the land and then the house and remaining land will not be subject to capital gains as its covered fully be private residence relief and
2) The actual value of the part of the garden would be a minimal amount anyway, as you are working on its value now, rather than what it was worth when it was purchased and you are already been given the value of the land being developed, as a cost against the capital gain.
You might recall our conversation back from June, where I told you I have a planning permission for a house to be built between my house and my neighbour's house. The plot it sits on is made up of two slices of land from both our gardens. I have an option agreement to buy the land from my neighbour so that the plot can be created. I now have a buyer. If I sell/ assign the option agreement to my buyer so that he will be buying my neighbours land directly, will this be sufficient to avoid potential capital gains tax?
Hope to hear from you over the weekend if possible.
Thanks for your further question
This would serve to
1) potentially create a capital gain to you by transferring the option back to the neighbour AND
2) potentially create a capital gain to your neighbour when they sell to the buyer.(although this would probably be negligible, as the increase in gain between your transfer and the sale, would not see much of a rise in value.
Good morning, and thanks for the answer Sam,
Just to be clear I would be assigning the option to the buyer not transferring it back to my neighbour. Does this make any difference?
Hypothetically, if there had been no option agreement in the first place:-
1.I obtain planning permission for the house on the two portions of garden
2.a buyer is found for the development
3.a price for the two plots is agreed (after apportioning all costs as a result of the development - obtaining planning permission, architects and planning fees, rebuilding a replacement garage, creating a replacement driveway, clearing the site, putting up a new fence)
4.the buyer purchases the two plots separately from each vendor
.... can it still be viewed that there is a capital gain for one or both neighbours.
And whilst I think of it if the separate sale prices are less than the stamp duty thresholds, wouldn't there be a saving of tax for the buyer?
I know I'm trying to be clever here, but if there's a way of legally processing this sale without the penalty of paying tax I'm open to suggestions.
Thanks for your response
You asked what the position would be if you assigned/sold the option, so that the buyer could buy directly from the neighbour.
Whether this is legally possible to in essence assign it back so that the neighbour sells the land, rather than you I do not know and you would need to seek advise on this.
But if it were possible, then there are three sales
1) You forfeiting your right to use the option, which may create a capital gain on the neighbours land
2) Then the neighbour would have a capital gain consideration as you are in essence making the land back to being his land
3) Creating a capital gain on the sale of your land.
This is a very complex matter and without the necessary legal expertise (which we UK tax experts do not specialise in property/land law, but tax law) I do not know how this would be viewed in a tax sense.
I feel anything you do now, to, in essence, undo the position for you and as a result lessen your own tax burden, is not going to work in your favour with HMRC and its capital gain taxes.
Had the option not been granted in the first instance, this would be very straightforward, as you have two sellers selling to one buyer, so each with a capital gain position and also stamp duty.
But whether you can undo the option without it having a position of having ever existed, is the real crux of the matter here. And that is the only way that you could better the position.
Thanks yet again... it is rather complex, I'll seek separate legal advise to decide my next move.
No doubt we will be in contact sometime in the future.