Residential Development Land - Income Tax

Residential Development Land

Introduction

The Finance Act 2000 introduced a 20% rate of tax in respect of income from dealing in residential development land. It applies for both income tax and corporation tax purposes. The legislation complements the 20% rate of capital gains tax for disposals of development land, the details of which are outlined in Tax Briefing, Issue 39 [March 2000].

This article details the income tax and corporation tax treatment which applies to the income of individuals and companies from dealing in residential development land.

Income Tax

For income tax purposes, the legislation [section 644A Taxes Consolidation Act 1997] takes effect from 1 December 1999. The profits of an individual earned after that date from dealing in residential development land will be taxed at the lower rate of 20%. The profits are ringfenced so that no offset for personal allowances and credits is possible. However, the taxpayer has the option of having these profits charged to income tax in the normal way thus allowing the offset of personal allowances and credits against the profits.

In any year the taxpayer may choose the option which best suits his or her circumstances. For example, in the unusual circumstances that a person dealing in land has not absorbed all of his or her personal allowances against other income, the person might choose to have the income taxed in the ordinary way.

Corporation Tax

For corporation tax purposes, the legislation [section 644B Taxes Consolidation Act 1997] takes effect for accounting periods ending on or after 1 January 2000. Where an accounting period of a company straddles 1 January 2000, the accounting period is split into two periods, one before and the other after that date.

The Finance Act 1999 introduced reducing corporation tax rates for trading income. The standard rate of corporation tax is 24% in 2000 and the rate will reduce by 4% per annum for 2001 and 2002 and by 3.5% for 2003 - giving a rate of 12½ % for 2003 and subsequent years. However, the 1999 Finance Act provides that trading income from dealing in land (other than so much of that income as is attributable to construction activities) is to be taxed at 25%.

Section 644B now provides that in the case of income from the disposal by companies of residential development land, the rate of tax will be 20% and not 25%.

Section 644A - Income Tax

A number of definitions are contained in subsection (1) of the new section 644A -

“construction operations” in relation to residential development land is defined. The effect of this definition is that development activities up to but not including the laying of foundations are included in the meaning of residential development land for the purposes of determining profits or gains to which the lower income tax rate (20%) applies.

“residential development” includes developments which are ancillary to the development and which are necessary for the proper planning and development of the area in question. Such ancillary developments would include shops, schools, churches etc.

“residential development land” is land which satisfies one of the following three criteria:

• Land sold to a housing authority, the National Building Agency Limited or an approved body for the purposes of section 6 of the Housing (Miscellaneous Provisions) Act 1992 provided that the land is specified in a certificate as being required for the purposes of the Housing Acts
• Land in respect of which planning permission for residential development has been granted, or
• Land which is zoned residential.

The definition follows exactly the description of residential land for the purposes of the capital gains tax relief.

Scope of the legislation - Income Tax

Section 644A applies to profits or gains which are:

• arising from dealing in or developing residential development land in the course of a trade consisting of or including dealing in or developing land, assessable under Case I, and
• gains of a capital nature from disposing of residential development land which, by virtue of section 643, are chargeable under Case IV.

Apportionment of income and expenses

A just and reasonable apportionment must be made of income and expenses of a trade as between dealing in residential development land and other activities by treating these two businesses as separate trades.

In computing the profits or gains to which the 20% rate of tax is to apply, no account is to be taken of any profits or gains which result from construction operations.

Example

John has been dealing in and developing land for a number of years. The following are his trading results for the year 2000/2001:

	£
Case I trading income	280,000
Expenses	65,000
Case V income chargeable	5,000
Case III income chargeable	3,000

£100,000 of the trading income arises from dealing in and developing residential land after 30 November 1999 and the expenses relating to this income amount to £25,000. John is single.

The position for 2000/2001 is as follows:

Dealing in/developing residential land income

	£
Trading income	100,000
Less expenses	25,000
	75,000
Tax	75,000	@ 20% = £15,000

Other income

	£
Trading income	180,000
Less expenses	40,000
	140,000
Case V	5,000
Case III	3,000
	148,000
Tax	17,000	@ 22% =	3,740
	131,000	@ 44% =	57,640
			£61,380
Less tax relief
Single personal allowance	4,700	@ 22% =	1,034
			£60,346

Total income tax due: £15,000 + £60,346 = £ 75,346

Election to have profits or gains taxed in the normal way

If a person so elects on or before the return filing date for the year of assessment (31 January after the end of the relevant year of assessment), section 644A shall not apply to those profits or gains for that year of assessment and the person will be taxed in the normal way.