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.