Legislation to broaden the scope of UK taxation of transactions in land occurring after 5 July 2016 was introduced in Finance Act 2016.

The new legislation replaced previous transaction in land rules and may apply to anyone with an interest in the sale or development of UK property.

Territorial expansion

In contrast to the previous rules, the transaction in land rules apply to resident and non-resident companies and individuals carrying on a trade of dealing in or developing UK land.

There is no requirement to have a permanent establishment in the UK and the activity can either be carried on directly or indirectly (such as via a partnership).

The legislation applies from 5 July 2016 with anti-forestalling rules applying to transactions on or after 16 March 2016. Anti-avoidance rules (designed to catch artificial arrangements) have also been introduced. These are outside the scope of this article.

Distinguishing between trading and investment activities

The rules introduced are applicable to trading profits and consideration will therefore be required to distinguish between trading activities and investment activities.

A trade of dealing in or developing land exists where land and/or property is acquired or developed with a view to profit on disposal. However where property is acquired for investment such as realising long-term rental profits and/or capital appreciation then the rules should not apply.

Trading profit

The transactions in land rules result in trading profits being taxed as trading income rather than a capital receipt.

Any profits (or losses) arising on the disposal of UK land will be treated as trading income if any one of conditions A to D applies:-

• Condition A: the main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the land.
• Condition B: the main purpose, or one of the main purposes, of acquiring any property deriving its value from the land was to realise a profit or gain from disposing of the land.
• Condition C: the land is held as trading stock.
• Condition D: (in a case where the land has been developed) the main purpose, or one of the main purposes, of developing the land was to realise a profit or gain from disposing of the land.

A point to note is that conditions A, B and D refer to the ‘main or one of the main purposes’. This test of purpose raises the possibility that the rules may apply to a broad range of transactions.

Any profit attributable to periods before the intention to deal in or develop the land was formed does not fall within the rules and so should be within the capital gains tax rules.

To illustrate how conditions A to D will operate in practice HMRC have provided a number of examples in their Business Income Manual, notably at BIM60560, which include the following:

1. A non-resident property investor purchases a property with a view to realising rental income from the land purchased. At the time that the investor purchased the land it anticipated holding the property for over 5 years. In fact, after 18 months, the investor sells the property early as a result of unforeseen circumstances. In this instance the main purpose of the transaction is the rental income and the sale was motivated by unforeseen circumstances so condition A would not be met.
2. An individual purchases a rundown block of flats. They intend to develop the flats into luxury apartments. After development they intend to keep 55 for rental and sell 45. In this instance a main purpose of acquiring the land was to realise a profit or gain from disposing of it (part of the land) so condition A would be met. The profit relating to the 45 apartments should be taxed as trading income. Where it is not possible to specifically identify costs relating to the 45 apartments a just and reasonable apportionment should be used.
3. A non-resident property investor purchases a property with the intention of developing then selling the property. After developing the property they let it out for 6 months while they wait for the market to pick up. In this instance a main purpose of acquiring the land, was to realise a profit from disposing of the land and condition A would be met.

Appropriation of stock to fixed assets

It should be noted that if the intention for development stock changes such that the developer decides to hold a property for its rental return, this would represent a deemed trading sale at market value on which a tax charge would arise.

Disposals of property deriving value from land

Profits from the disposal of any property that derives its value from land rather than from the land itself may also be taxable under the rules.

One possible scenario to illustrate this would be the sale of shares in a UK property-holding company where the land is not held in trading stock but the shareholders had intended to construct a property from which rental income could be earned and also to sell the shares on completion of the development. In this case (assuming all the relevant conditions apply) the relevant amount of the profits would be treated as trading profits of the shareholder.

The applicable conditions are as follows:

• A person realises a profit from a disposal of any property which (at the time of disposal) derives at least 50% of its value from UK land,
• The person is a part to, or concerned in, an arrangement concerning some or all of the project land, and
• The main purpose or one of the main purposes of the arrangement, is to deal in or develop the project land and realise a profit from the disposal of property deriving the whole part of its value from that land.

The relevant amount is determined on a just and reasonable apportionment of the amount of the profit which is attributable to the relevant UK assets (i.e. any UK land from which the property derives its value).

If profits arising from a land disposal would be brought into account as trading income they will not be taxed again. This seeks to prevent a double charge to UK taxation.

For example, there should be no charge on the sale of shares in a trading company where all the land is held as trading stock as the trading profits would be chargeable on the company.

Anti-fragmentation

The anti-fragmentation rules have been introduced to prevent profits being fragmented between associated parties and placed outside the charge to corporation tax or income tax. For example, if fees were payable to a non-resident associated service provider who was not subject to UK taxation then the ‘fee’ in the stock cost at the point of sale would be ignored.

Where the relevant conditions (details not included in this article) are met the profits of the associated parties will be combined and the person making the disposal will be taxed on the whole amount.

There are also rules regarding relevant contributions and restrictions on interest payments which would need to be considered on a case by case basis which have not been covered in this article.

Non-resident companies in receipt of rental income

As detailed above, the transaction in land rules are applicable to both resident and non-resident persons.

A non-resident company within the new corporation tax charge may receive rental income from properties it holds as part of its trade. The treatment of this rental income will depend on the existence of a permanent establishment in the UK.

• If the company has a permanent establishment in the UK the rental income will be assessable to corporation tax, whereas
• If the company has no permanent establishment in the UK the rental income will be subject to income tax under the non-resident landlord scheme.

It is worth noting that the UK government is currently exploring the possibility of bringing the taxation of non-resident landlord companies within the scope of corporation tax.

Conclusion

The breadth of the new transactions in land legislation suggests that the rules will be applied more frequently than the previous rules. The rules will be of particular relevance to non-resident owners of UK land, but may also impact on the tax treatment of UK resident property owners engaged in trading and development activities.

Peter Davis is a tax manager with Deloitte

Tel: +44 28 9592 3537

Email: petedavis@deloitte.ie