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We have been asked for advice on mitigating the overall tax liabilities (including stamp duty) with regards to the following matter.
The client owns land that has been used for several years for grazing. About twelve months ago he obtained outline planning permission for twenty building plots. Final planning permission is expected to be granted shortly and the client then proposes to develop the site by first putting in full services, including roads, at a cost of approximately £200,000. He proposes to obtain bank borrowing to finance this initially.
We have been asked for advice on mitigating the overall tax liabilities (including stamp duty) with regards to the following matter.
The client owns land that has been used for several years for grazing. About twelve months ago he obtained outline planning permission for twenty building plots. Final planning permission is expected to be granted shortly and the client then proposes to develop the site by first putting in full services, including roads, at a cost of approximately £200,000. He proposes to obtain bank borrowing to finance this initially.
He will retain one of the plots to build a house for his own occupation. Four plots (with full services) will be sold at £60,000 to £70,000 each, the proceeds of which will be used (a) to pay off the bank and (b) to assist with the building cost of the house intended for himself. Thereafter, he proposes to engage a builder to construct a house each year, which will then be sold.
He wants to undertake this trading activity jointly with his daughter. He has also asked whether there would be any taxation advantage in operating through a limited company in respect of the whole venture or alternatively engaging the limited company to undertake the works.
Query T16,623 — Libra.
Reply from 'A.C.B.'
It is unclear from the facts as to whether Libra wants to have agents do the building work on his behalf or whether he will enter into a 'slice of the action' (so described in the Revenue's Business Income Manual at para BIM60350) scheme with a builder not acting as agent.
The former seems more likely in view of the comment that the client wants '… to undertake this trading activity …' as well as the comments on how short-term finance is to be arranged and paid off by early sales. This may create a 'supervening trade' (see para BIM60060) notwithstanding that the grazing land was presumably bought with the intention of being a capital asset at the time of purchase. If a trading venture has started (normally from the date the clear intention was formed to develop the land) then there will either be an appropriation of the land into trading stock giving rise to a notional disposal for capital gains tax purposes (TCGA 1992, s 161) or a disposal at market value to a connected entity (the daughter as partner or a connected company). If, however, a 'slice of the action' arrangement is contemplated, the same result arises through TA 1988, s 776(2)(c) and s 776(7). In either case it would be possible for the capital gains tax on the accrued gain to be postponed appropriating the land on a no gain/ no loss basis (thus increasing the eventual income tax charge). The plot chosen for the main residence should be separately identified in advance so that it remains a capital asset outside either set of rules.
A partnership with the daughter or a company controlled by the client and the daughter would presumably hold the land (inheritance tax business property relief would otherwise be restricted to 50% under IHTA 1984,
s 105(1)(d)). A transfer to the partnership is initially subject to stamp duty land tax under FA 2003, Sch 15 para 9(1)(a), though if the bank charge is delayed until after the transfer then the formula in FA 2003, Sch 15 para 10 would not create a liability unless the daughter paid actual consideration for her interest. This seems likely as full relief will no doubt be sought for the interest paid to the bank for the infrastructure loan, whereas a transfer to a connected company would involve stamp duty land tax on market value via FA 2003, s 53.
The accrued gains, potential financial reward, whether profits are to be distributed or applied to further ventures and stamp duty land tax are all matters that will determine whether a partnership or corporate structure is preferable.
Either a partnership or a company could fall within the ambit of the Revenue's widened application of the settlement legislation leading to a charge on the client alone. What expertise and involvement the daughter brings to the venture may be critical in this respect.
