Looking for relief

Capital gains tax rollover relief under the convoluted provisions of TCGA 1992, ss 152 to 159 does not distinguish between voluntary and involuntary disposals by the taxpayer. So if a taxpayer is forced to dispose of land under a compulsory purchase order and is able to satisfy the requirements of the legislation, rollover is available.

But s 152 does not assist property investors, even if they have no choice as to when (and to whom) they dispose of their property. Nor does it assist a trader who reinvests the sale proceeds in land which is held as an investment; see s 152(1). Furthermore, if the land has been used for the purposes of the taxpayer's trade for only part of the period of ownership, the relief will be restricted under s 152(6) and (7)

These limitations in s 152 have come to the fore over the last year with the UK winning the vote to host the 2012 Olympics and the resulting need for land to house this huge event. The London Development Agency has begun issuing compulsory purchase orders on landowners in the affected areas. Many of those landowners cannot satisfy the requirements of s 152.

However, relief is available elsewhere in TCGA 1992. Finance Act 1982 introduced rollover provisions which apply to all taxpayers where there is an element of compulsion in the disposal. The relevant provisions are now in TCGA 1992, ss 247, 247A and 248. Before that time, the only relief specifically targeted at compulsory purchase was the small part disposals provisions, now contained in s 243. Those provisions are not discussed further in this article, except where they are relevant to relief under s 247.

Section 247 relief generally attracts far less attention than s 152 relief and its full implications are frequently overlooked, probably because the side note to s 247 is misleading. It says: 'roll-over relief on compulsory acquisition'. Many advisers might assume that the section is of limited application and read no further until they encounter a client whose land is already subject to a compulsory purchase order.

The side note to s 247, however, tells only part of the story. The relief is available in many cases where the disposal is not the result of a compulsory purchase order.

The basics

The basic thrust of s 247 is to permit rollover relief in the same manner as relief under s 152, but only on disposals of land in which the proceeds are reinvested into further land and where the disposal is a result of the exercise of compulsory powers or is to a body having such powers, as to which see below for detail.

The timing criteria for reinvestment are the same as those in s 152(3) (see s 247(5)(b); see also s 246 on the timing of disposals and acquisitions) and the same theoretical issue arises as to how the disposal consideration can be 'applied' by the taxpayer up to one year before the disposal; see Watton v Tippett [1997] STC 893. The point is, rightly, ignored in practice by HMRC. The provisions concerning partial rollover are essentially the same as those in s 153 and there are also rules dealing with rollovers into wasting assets.

In addition, there is, as with s 152, the right to make provisional claims to relief before reinvestment takes place (see s 247A), a right to rollover where another group company makes the acquisition, and a prohibition on 'roll around relief' where assets are acquired intra group: see s 247(5A). The remainder of this article deals with the elements of s 247 relief that differ from s 152 relief.

As for the language of the statute, s 247(1) requires that:

'(a) land (“the old land”) is disposed of by any person ('the landowner') to an authority exercising or having compulsory powers; and

(b) the landowner did not take any steps, by advertising or otherwise, to dispose of the land or to make his willingness to dispose of it known to the authority or others; and

(c) the consideration for the disposal is applied by the landowner in acquiring other land …'

An obvious point which emerges from the section is that the relief relates to disposals and acquisitions of land only. The greater flexibility of s 152, which covers a wide range of assets in respect of which rollover is permitted, is absent from s 247. Compulsory purchase powers are generally directed towards the acquisition of land, so it is not surprising that the draftsman restricted the relief to disposals and acquisitions of land. (It should further be noted that there is statutory power to authorise the acquisition of any kind of property in an emergency under Civil Contingencies Act 2004, s 22(3).) No doubt a policy case could be made for extending s 247 so as to permit rollover where the new asset is not land, but an asset which would satisfy s 152.

What is 'land'?

Section 247(8) says that 'land' includes any interest in or right over land so, subject to wasting asset issues, a freehold disposal can be rolled over into a leasehold acquisition. This partial definition addresses rights and interests in and over land, but says nothing about its physical nature. Does 'land' therefore include buildings?

The other partial definition of 'land' in TCGA 1992 is to be found in s 288(1) which says:

‘In this Act, unless the context otherwise requires – … “land” includes messuages, tenements, and hereditaments, houses and buildings of any tenure.’

So both definitions expand the natural meaning of ‘land’, but in largely different ways – one is concerned entirely with the legal nature of land: the other is largely concerned with its physical nature. Crucially, there is nothing in the context of s 247 that requires the definition in s 288(1) to be disapplied. Each can apply to land which is the subject of a s 247 claim, with virtually no overlap and certainly with no direct conflict. It should follow that ‘land’ here must include buildings.

This also appears to be HMRC’s view. Statement of Practice 13/93 accepts that s 247 relief can apply to shelter gains on the disposal of buildings and can apply where the rollover is into buildings rather than bare land. It should be remembered, however, that both HMRC and the courts have taken a different view of the meaning of ‘land’ in other statutory contexts; see Starke and another (Brown’s executors) v CIR [1995] STC 689 as to whether the definition of ‘agricultural property’ in IHTA 1984, s 115(2) evinced sufficient contrary intention for the definition of ‘land’ in the Interpretation Act 1978 to be disapplied.

Build your own?

A second issue as regards buildings is: given that ‘land’ includes buildings for the purpose of the relief, can expenditure incurred on the construction of a new building on land already owned by the taxpayer constitute the application of disposal proceeds ‘in acquiring other land’ for the purposes of s 247? As a simple matter of language, it is by no means clear that the amounts paid to a builder for the construction of such a building will satisfy this requirement.

In addition, the expenditure is arguably incurred on the enhancement of the existing asset, namely the existing land, rather than on the acquisition of new land, as defined. Even if ‘land’ is defined so as to include buildings, that does not mean that the building and the land are separate assets. See ss 23(7) and 24(3) which strongly suggest that in normal circumstances, land and the buildings standing on it are a single asset. This may be the reason for Extra-statutory Concession D22, which relaxes the position where s 152 relief is claimed for enhancement expenditure on existing holdings of land.

There is no corresponding concession for s 247, so taxpayers should tread with extreme caution here.

Excluded land

Understandably, the relief is denied when the land acquired by the taxpayer qualifies for private residence relief or does so within six years of its acquisition; see s 248.

However, s 247 has no equivalent to s 159(1). That subsection prevents the rollover of gains where the replacement asset is not a chargeable asset. This prevents non-residents from rolling over gains on the disposal of UK assets into foreign assets used for the purposes of the same trade, as the subsequent disposal of such assets would not be subject to tax; see s 10.

Accordingly, a UK resident but non-domiciled individual who disposes of UK situs land in a transaction to which s 247 potentially applies can reinvest the proceeds in new land situated outside the UK and still be eligible for relief. Any disposal of the overseas land by a non-domiciled but UK resident individual would fall outside the charge to CGT, unless the proceeds are remitted to the UK. See s 12.

Is a CPO necessary?

Whatever the side note to s 247 says, i.e. ‘roll-over relief on compulsory acquisition’ the actual text of the section makes no direct mention of compulsory purchase orders and does not, at first sight, require the disposal to have been made as a result of the exercise of compulsory purchase powers. It merely says that the disposal must be to ‘an authority exercising or having compulsory powers’.

Section 247(8) says that this phrase is to be construed in accordance with s 243(5), which says:

‘In this section “authority exercising or having compulsory powers” means, in relation to the land transferred, a person or body of persons acquiring it compulsorily or who has or have been, or could be, authorised to acquire it compulsorily for the purposes for which it is acquired, or for whom another person or body of persons has or have been, or could be, authorised so to acquire it.’

Long-winded as it undoubtedly is, this definition makes it clear that actual compulsory acquisition is only one possible way of satisfying this part of the legislation. Even without the exercise of compulsory powers, the relief can apply if the person making the acquisition has compulsory powers (‘who has ... been or could be authorised to acquire it compulsorily’) and the purpose of those powers is also the purpose for which the acquisition is actually made.

So if the only power possessed by the person or body is a power to acquire for the purposes of building a railway from A to B, a sale of an office building to that body for its own occupation is most unlikely to be capable of attracting relief. The power of compulsory acquisition is unlikely to permit the compulsory acquisition of an office building for occupation by the railway company.

However, many compulsory purchase powers are extremely wide. This can in theory extend the relief considerably. Consider the freely negotiated sale of an office building by an investor to a regional development agency, which will occupy the building for its own use. The purposes for which such an authority can compulsorily acquire property are incredibly wide, certainly wide enough to encompass the acquisition of the building for its own use.

See the Regional Development Agencies Act 1989, ss 4, 5 and 20.

Accordingly, a chargeable gain on such a sale could be the subject of a rollover under s 247, provided that the other requirements of the section were fulfilled. There are practical difficulties in making use of the apparent width of the relief in such circumstances, namely the provisions of s 247(1)(b); see below.

Who can be an ‘authority’?

Many ‘official’ bodies, including central government and public and local authorities, have powers of compulsory purchase for a host of purposes. See for example, the powers of the Secretary of State for Defence under the Military Lands Act 1892 and of regional development agencies under the Regional Development Agencies Act 1989.

But the possession of such powers is not confined to ‘official’ bodies: commercial organisations frequently possess compulsory purchase powers. Utility companies and railway companies are obvious examples. Their powers are usually granted by private Acts of Parliament, for example the Channel Tunnel Rail Link Act 1996. HMRC accept that a tenant exercising a right to buy a freehold reversion under the Leasehold Reform Act 1967 can be an ‘authority’ for the purposes of s 247; see SP 13/93.

Inchoate compulsory powers

It is tempting to argue that sale to a person who does not currently possess compulsory powers could nevertheless fall within the ambit of s 247 because s 243(5) refers to ‘a person or body of persons … who has or have been, or could be, authorised to acquire [the land] compulsorily …’

This could, taken literally, apply to anybody at all, as it is conceivable that Parliament might confer powers of compulsory purchase on anybody. But any such argument is wholly unrealistic and ignores the messy structure and history of compulsory purchase. The more realistic explanation of the draftsman’s use of ‘could be’ is that it is intended to cover bodies whose powers of compulsory purchase are subject to the authorisation or confirmation of a third party, such as a Secretary of State.

For example, the Acquisition of Land Act 1981 follows a two stage procedure under which the body seeking to effect a compulsory purchase must usually have its order confirmed by the Secretary of State. Arguably, such a body only possesses the compulsory purchase powers once it receives that confirmation. Until then it arguably only falls within s 247 because it ‘could be authorised’ to acquire the land compulsorily.

Powerless purchasers

The definition in s 243(5) has a further feature: it also treats as ‘an authority exercising or having compulsory powers’ a person or body of persons ‘for whom another person or body of persons has or have been or could be authorised … to acquire … [the land compulsorily for the purpose for which it is acquired]’.

So a purchaser with no compulsory powers of its own can be regarded as ‘an authority exercising or having compulsory powers’. What if a property investor (who is never able to benefit from s 152) sells land to a developer and the land lies within the area of a regional development agency, which has extensive compulsory purchase order powers within its area? The agencies’ areas, taken together, cover the whole of England (see Sch 1 to the 1989 Regional Development Agencies Act) and an agency can acquire property compulsorily and dispose of it at an undervalue, if that would further the economic development and regeneration of its area and the Secretary of State consents. See ss 4 and 5 to that Act.

So, can the investor sneak within the s 247 rollover provisions simply because the agency could be authorised to acquire the land for the developer, even if the developer and the agency have never spoken?

At a less extreme level, what if the agency says that it would consider going through the compulsory purchase order process if an investor does not act promptly to develop its land and, in the event of such an order being made, it would then consider selling to the developer? Could that assist the investor who then sells to that developer and reinvests in other land to claim relief under s 247?

It seems to me that these arguments, which have certainly been put forward to investors by developers, misunderstand the draftsman’s intention. This appears to have been to allow rollover relief for compulsory purchase order disposals and for disposals entered into to avoid having to go through the process. So where an acquiring authority had power to acquire on behalf of another, it would be sensible for s 247 to relieve direct sales to that other person.

Compulsory powers of this kind do exist. One can be found in the Military Lands Act 1892, s 1(3), where the acquiring authority (a county council) has power to acquire land on behalf of others (certain volunteer organisations, which themselves are capable of holding property in their own name).

The existence of such a specific compulsory purchase order power suggests, albeit not conclusively, that the court is likely to regard the use of ‘for whom’ in s 243(5) as requiring a narrow interpretation – applying it only to situations in which there is a clear statutory authority under which one body has power to acquire on behalf of another. Since the contrary argument could make s 247 available to virtually all sales of investment land, it would be surprising if the courts did not take a narrow view here.

Marketing

It must be remembered that s 247(1)(b) will prevent rollover if the owner has taken active steps to sell the land. Its requirements are:

‘The landowner did not take any steps, by advertising or otherwise, to dispose of the old land or to make his willingness to dispose of it known to the authority or others.’

This does not mean that the landowner must not intend to sell. That would be illogical, as s 247(1)(a) clearly allows relief where the sale is not under a compulsory purchase order. It is active marketing and the communication of an intention to sell that creates difficulty here. What can a landowner say when approached by an authority that is minded to exercise its statutory powers? Must he initially put on a show of unwillingness? Must he continue to do so and, if so, for how long? If, when approached, he says that he is perfectly willing to sell, has he fallen foul of s 247(1)(b)?

It seems to me that the answer is in the negative. A response to an approach cannot, in the context of this legislation be the ‘taking of steps, by advertising or otherwise … to make his willingness to dispose of [the land] known …’

A further issue here is communication to one’s own advisers, such as solicitors or chartered surveyors. Even if no marketing of the land is undertaken, is the communication to one’s own advisers of a willingness to sell sufficient to contravene s 247(1)(b) even when those advisers have not been authorised to pass the information to third parties?

The answer must be that communication to one’s own advisers is not communication to ‘others’ in the context of this legislation.

What if the landowner has marketed the land previously but then decided not to sell? Section 247(1)(b) has no time limit, so arguably any earlier marketing of the land by that owner causes difficulties. Fortunately, HMRC have a practical solution to this. HMRC’s CGT Manual para 72202 says that any activity that falls foul of s 247(1)(b) is to be disregarded if it took place more than three years ‘before the compulsory acquisition in question’. Presumably this is also intended to apply to sales to authorities having compulsory powers, rather than just to disposals under an actual compulsory purchase order, but the paragraph does not say that.

Miscellaneous

Finally, it should not be forgotten that the amount received by the landowner may not strictly relate solely to the land.

Some may relate to goodwill or trade disturbance or to the reduction in value of land that is not disposed of. Section 245 deals with these issues and potentially reduces the amount on which s 247 relief can be claimed.

Issue: 4074 / Categories: Comment & Analysis , Capital Gains , Land & property