Selling land: What are the tax implications?

For most individuals looking to sell small plots of residential land in the UK, tax is usually not an issue. Any uplift earned from selling land of this type will typically not see any deductions due to taxation. For larger plots of land, this situation may change, meaning you may have to account for taxation when that land is sold. This can apply even when the entire process takes several years to complete. Consequently, knowing the type of taxes you may have to pay is an important step if you're in possession of a larger plot of land you're looking to sell.

When do I need to pay tax for selling land?

As mentioned above, it's important to point out that there is usually no tax that needs to be paid for any sales involving land smaller than 0.5 hectares. If you're looking to sell smaller plots of land - such as your main residence or part of your garden - any uplift earned once a sale has been completed should be tax-free.

If the plot of land you're looking to sell is considerably larger (such as a farmer's field or an industrial site), taxation will be a factor worth considering, the details of which can be found below.

Capital gains tax

Once your sale is complete, you may have to pay some deductions. These deductions will be part of your capital gains tax. If you inherited the land, you might have to pay the probate cost as well. On the other hand, you will also have to budget for incidental selling costs and acquisition costs.

Capital gains tax applies when your land sale is more than your yearly exemption. Currently, the capital gains tax for such individuals is £11,300 (2021). For residential property, any increase above the maximum exemption will be charged an extra 28% tax deduction.

The capital gains tax was revised by the Finance Act of 2016. The Act states that taxes can't be more than 28% of the land sale proceeds. The legislation also clarified disposable land and residential property. Therefore, if your land can be converted from commercial to residential, you could be protected from certain taxes.

Income tax

Some land sales attract income tax, though most people prefer capital gains tax because it's lower.

Many developers build structures to pay capital gains instead of income tax. When this practice became rampant, the government created new anti-avoidance regulations in 2016. The aim was to make sure that companies pay income tax when they sell land for profit. Nevertheless, this is still a grey area since classifying a particular land trade is difficult. The tax authorities will evaluate the seller's intention before asking for capital gains tax or income tax.

First, they will try to determine whether you are trying to make a profit from your sale. If you have been doing similar transactions in the recent past, then a profit motive may be detected. In this case, you may be asked to pay income tax.

Another consideration will be the type of financial arrangement. Short-term financing and ownership are indicators of a profit motive. Consequently, if you are selling land that you bought within the last year, you may have to pay income tax instead of capital gains tax.

Finally, the tax regulator will scrutinise the sale contract. For instance, profit-sharing shows a profit motive. If you will own a part of the subsequent real estate development, you can't claim capital gains taxes. Remember, it's always best to seek out professional advice on tax before making any decisions.

Detailed information

After you have sold your land, your tax adviser will ask for several documents. They will use these documents when filing your tax returns. Some of the main things that they will request include:

Acquisition details

A transfer deed usually accompanies any land transaction. Your tax adviser will request this document to determine your probate value. The probate value comes into play when selling inherited land. They may also require copies of the will and land deeds.

If the land was a gift from a benefactor, you would have to provide details of the gift. The reliefs received during the date of the gift can be claimed as tax deductions. Similarly, the land value of any gift received before April 1982 will be lower. This is because the valuation will not be adjusted for inflation.

Improvements and additions

You may decide to do some things to increase the value of your land. Such improvements and additions reduce your tax rates because you can claim them as deductions. Nevertheless, you must prove that the extra cost went to the enhancement of the land. For example, if you spend money on creating better drainage on the land, you should provide the corresponding documentation to your tax adviser.

Professional deductions

Many people may be involved in the sale of the land. For example, agents and attorneys, who will levy some fees. HMRC may give you deductions if you can prove that they were incurred during the disposal of the property. Consequently, your agent should give you an invoice that indicates the land registration details, which can support your deduction claims.

Evidence of intentions

As indicated above, the boundary between capital gains and income tax is not clear. Several factors come into play when determining the type of investment. In many instances, the final judgment will be based on the documents that you provide to HMRC. If you want to pay capital gains tax, you should stay away from documents that show a profit motive.

Final words

Selling land is a straightforward process when you work with the right people. Although you can hire a tax adviser to guide you through the process, you should know the tax implications of land transactions. This is the best way to avoid surprises and unnecessary tax expenditures. If you are looking to sell land for development, we'd be interested in hearing from you. We can not only purchase your land, but we have an experienced planning and construction team to manage the whole process from start to finish. Get in touch for a free review of your land. NFC Homes and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

How to convert commercial property into residential

There were once many restrictions on the process of converting a commercial property into residential premises. Fortunately, the situation changed in the middle of the last decade.

Today, converting a commercial property into a residential development is a simple process. As a result, increasing numbers of developers are purchasing and altering commercial properties for residential means, thanks in part to their larger floor space which means they can even be used for multi-occupancy homes. That being said, the process can still be a long, tedious and expensive one if you don't know what you're doing.

Read on to find out how to convert a commercial property into residential.

What to consider when converting commercial property into residential

Before you can begin the process of converting your commercial property into residential property, there are several things that you must bear in mind. This includes:

Check the building's classification

UK building regulations categorise every building in the country in a specific use class. Class A encompasses buildings that provide commercial services.

Class B usually includes warehouses and commercial offices. Residential buildings are considered part of Class C.

The final class is Class D, which includes miscellaneous buildings such as cinemas and leisure buildings.

Consequently, you must know the classification of your intended building. Each class has its own conversion rules which may present some challenges. For instance, commercial properties have flexible conversion rules for developers, but the situation is not the same with buyers.

The cost of conversion

There will be specific costs incurred during the conversion process. Even when you're not starting the process from scratch, you will end up spending a lot of money if you don't understand the process well.

This might be the case for buildings that need extensive repairs and structural changes. The entire cost may eat into your profits.

Understand planning permission rules

Obtaining planning permission is not a standard requirement, but you should be prepared for it so ensure you enquire with the local authority whether you need any consent before beginning the conversion.

Permission may be compulsory for projects that involve knocking down walls. Consequently, any costs associated with obtaining permission should be included in your budgeting process. For more information on planning permission, you can view our recent article on the subject here.

The conversion process

The conversion process is determined by the GPDO directive of 2015. This directive removed some obstacles to give residential developers more flexibility.

Here are some of the steps involved:

Create a budget

Before you start looking for commercial buildings to convert, you will need to work out your budget. Knowing how much money you are willing to spend can save you a lot of trouble along the way.

You will save a lot on the conversion project if you can determine unexpected costs before the project starts. It is generally recommended that you should budget for more than is required. The total cost encompasses building purchase, land valuation costs, and permission approval expenses.

Find the ideal property

It's now time to look for the right property. Commercial properties in a particular location or with specific structural or architectural features may be high on your list and could potentially add greater character to the residence in future, which could increase its resale value. In the short term, they may also provide good rental returns. Arrange to speak to a professional real estate expert who can help you find the right property to convert.

Check the building's classification

Once you have found a property, you will need to confirm the building's class type (as described above) before you can begin with the conversion as some restrictions may apply.

Confirm any exceptions

While most commercial buildings can be converted into residential areas, there are some exceptions. Buildings within national parks and designated government structures cannot be converted to residential properties.

The same applies to any building that the government deems to be a security hazard. For example, if a building was initially used for military experiments, it cannot be converted into a residential area.

Therefore, you should check if there are any exceptions for the building you want to convert into a residential property. At the same time, you should keep an eye on the required standards.

Some design plans may prohibit specific structural changes. This prohibition technically stops any conversion process.

Seek the necessary permission

As mentioned above, you may not need planning approval for some conversions, but the local council must approve your upcoming projects. If the building is used as a bank, showroom, shop, or retail warehouse, you will need permission from the local council.

Buildings that cover more than one hundred and fifty square metres have extreme conversion regulations. You may also need conversion permission if you want to change the doorways or stairways.

Get funding

There is a range of financing options that you can use to fund your conversion project. You may be eligible for a bank loan or a mortgage from a building society to help convert a commercial building into a residential one.

Conclusion

Converting a commercial property into residential property is a smart move. If the commercial property is not functional or profitable in its current state, then it may be better utilised as a place of residence. However, you must understand the conversion process and pay due diligence if you want to do it correctly and save time and money. If you own a commercial property and are looking to either convert it or sell it on, contact us today for a free no-obligation quote.

Can you use commercial property as residential?

With many commercial properties appearing on the market each day and residential property prices rising, people are looking for non-conventional solutions to create more affordable properties. Historically, using commercial property as residential had many restrictions attached to it. In recent years, however, it has become more feasible.

As a result of the 2015 General Permitted Development Order (GPDO) amendment, it is now possible to convert a commercial property into a home. Planning permission also isn't required if the conversion is covered by permitted development rights, or if the property will be converted within the same class.

The government categorises commercial properties in different "classes", so whether you'll need planning permission will depend on this. Ensure that you find out which class your property is in before undertaking any conversion work. Failing to do this may mean that you encounter problems in future regarding planning permission. The rules can be complicated, so often it's best to consult the guidance of a professional. If you'd like to seek assistance regarding commercial property, our team are always on hand to discuss converting commercial property into residential property, so feel free to get in touch.

Benefits of converting commercial property

There are many benefits to converting a commercial property. For instance, commercial properties are often close to amenities and transport links. Since many retailers have turned to online sales, retail properties are often available at a lower price and give investors good value for money.

Commercial properties are great starting points for those looking to create houses of multiple occupancies (HMOs). These are great for investors as they generate more revenue than single-let properties.

In what instances are you unable to convert a commercial property?

Some circumstances will prevent a conversion. These include if the property is located in a national park or conservation area, an area of natural beauty or scientific interest. Additionally, if the building is in an area that is considered a safety hazard or where military explosives are handled or stored, then a conversion will not be possible.

Converting listed buildings

Although converting a listed building is possible with permission, it can be quite a difficult task. It will usually require the owner to complete the full planning permission process and may even require architectural drawings or the planned conversion to be provided. As with all listed buildings, making changes may require the use of certain materials and for the work to adhere to a standard in which the preservation of the building's history is the main priority.

Converting a commercial property can come with substantial costs, so it's important to familiarise yourself with what to expect.

Cost considerations

The costs of converting a commercial building can quickly add up, so you must include these in your budget. This may include planning permission fees, solicitors fees, surveying, and construction fees covering things such as residential drainage, electrics and plumbing. Stamp duty will also need to be paid on the property.

Safety and liveability considerations

Before a commercial property is deemed fit for residential use, several safety standards will need to be met. These include safely removing any hazardous materials and ensuring the property adheres to residential plumbing, electrical and gas regulations.

If you are planning to let the property, it's also important to consider whether the property would be desirable to tenants. For example, if the property lacks parking facilities, whether noise pollution is a problem and its distance from the nearest school.

Funding the property

Mortgages surrounding residential properties can be a little more complicated. Although you may still be able to obtain a mortgage, you may need to take out insurance to cover the building while it is being renovated under the mortgage terms. You may also apply for a self-build mortgage. This can be beneficial for conversion but may mean you need to pay out the conversion costs upfront before being reimbursed. This will, however, depend on the terms that you agree with your broker.

Common issues with commercial property conversion

If you fail to do your research before taking on a commercial conversion, you may find yourself in unexpected situations. Commercial properties can come with structural issues that will need to be addressed before they are deemed liveable, so it's always best to identify these before committing to buy the property.

Ensure that you consider all costs that may arise, including any structural repairs and that you have adequate funding in place. Conversions can also sometimes take much longer than expected, so ensure you consider this in your planning. You may also need to work with specialist commercial property surveyors and fund several commercial building surveys, so it's important to consider this in your budget.

NFC Homes specialise in converting commercial property into residential property, with more than 15 years of experience. Contact us today for a free evaluation of your property.