.png)
.png)
Horse trading necessary?
My clients have entered into a conditional contract to sell land and buildings used by their family company in its trade of horse training. The condition to be satisfied is that planning permission is obtained on at least a certain defined area comprising part of a larger area specified in the agreement.
Horse trading necessary?
My clients have entered into a conditional contract to sell land and buildings used by their family company in its trade of horse training. The condition to be satisfied is that planning permission is obtained on at least a certain defined area comprising part of a larger area specified in the agreement.
If planning permission is obtained for an area beyond the minimum defined area, additional consideration will be paid by the developers to be satisfied by the value of work on erecting certain buildings to be used by my clients' family trading company in its trade.
Presumably the Inland Revenue would regard the expenditure on erecting the new buildings as being incurred by the developer and not necessarily my clients, and thus deny rollover relief in respect of such expenditure?
Alternatively, do readers feel one could successfully argue that the consideration being earmarked for qualifying assets could be regarded as qualifying expenditure for rollover relief purposes?
(Query T15,917) – Pre-Raphaelite.
Section 152(1), Taxation of Chargeable Gains Act 1992 allows rollover relief if:
'… the consideration which a person .... obtains for the disposal of .... assets used for the purposes of the trade .... is applied by him in acquiring other assets ..... which on the acquisition are taken into use ..... for the purposes of the trade, and the old assets and new assets are within the classes of assets listed in section 155 .....'
The asset being disposed of is the land owned by the client. The assets he is seeking to rollover into are new buildings, to be constructed by the purchaser of the land. I am assuming, for the purposes of the answer, that both the old and new assets would be used for the purposes of a commercial trade that would qualify for relief.
If the agreement to construct new buildings for the clients is in exchange for the sale of the land, the market value of the new buildings, or what the clients would have paid for them, becomes part of the consideration that the clients obtain for the disposal of the land. The first leg of section 152(1) is therefore satisfied.
Is the second leg satisfied? Do the clients apply this consideration in acquiring other assets? On a literal interpretation they do not, since the consideration is in the form of other assets, and therefore they have to apply nothing. It seems unlikely that the Revenue would take such a literal interpretation but, if there is any doubt, surely the answer is to construct the agreement so that the clients sell the land to the developer for a cash sum, and in a separate agreement agree to pay the developer the same sum to construct the new buildings. The uncertainty is then removed.
Care needs to be taken to ascertain both the date of the disposal and the amount of the consideration accurately since these will affect the timing and the amount of the relief. The date of disposal for a conditional contract is the date the contract becomes unconditional (section 28(2), Taxation of Chargeable Gains Act 1992). It is widely assumed that if a contract for the sale of land is conditional upon the obtaining of planning consent, then the contract is conditional, and the date of disposal will be when the consent is granted. This should not be automatically assumed. For example, in the case of Hatt v Newman [2000] STC 113 it was observed that a condition relating to planning consent could arise under an unconditional contract. In order for a contract to be conditional, it might be necessary to ensure that the condition is contingent, precedent to legal liability and a condition which neither party covenants to bring about, but which has to be satisfied before liabilities to perform the contract arises.
If the consideration is a known amount, but is contingent, section 48, Taxation of Chargeable Gains Act 1992 will apply. The section notes that:
'In the computation of the gain, consideration for the disposal shall be brought into account without any discount for postponement of the right to receive any part of it and, in the first instance, without regard to a risk of any part of the consideration being irrecoverable or to the right to receive any part of the consideration being contingent ......'
The section can have the effect of taxing sums that are not received for a very long time. A possible trap here is that if the contract becomes conditional more than three years before the buildings are constructed, and brought into use for the purposes of the trade, the client will be outside the statutory three-year period for relief under section 152 and will have to rely on the Revenue exercising its discretion to extend the time limit.
Where the consideration is both contingent and not fixed in amount, as may be possible here, the problem is worse. The contingent and unascertainable consideration needs to be valued, and this is taxed at the time of disposal as required by section 48, Taxation of Chargeable Gains Act 1992, as above. The clients then are deemed to acquire a chose in action, i.e. a right to further sums, which if they are paid will be regarded as sums received in respect of this right, and not the underlying assets (see Marren v Ingles [1980] STC 500). These amounts will not qualify for rollover relief as the right is not a qualifying asset for rollover relief purposes. – Hayloft.
This sounds to be a similar query to that under the heading 'No cash to pay' in Taxation, 1 November 2001 at pages 126 and 127. My answer pointed out the need for care in managing the project - in that case, the construction of property for letting with the builder receiving consideration in the form of long leases on a number of units. I suggested that professional valuations of the work would be needed as it proceeded, and that the contract should deal with the potential problems arising if there were delays.
Although this project is a little more simple, there will still have to be a value for the construction work in order to put a price on the extra land being sold, which will be needed for various reasons including, I surmise, stamp duty. No doubt the lawyers will advise on a contract for the sale of that land tied to one for the construction of the buildings with completion of the sale being upon acceptance of the finished buildings.
The VAT, which the developer will have to charge on the construction work, will be recoverable against future taxable use of the new buildings. The possible problem appears to be the sales of the initial parcel of land and of the extra one. Opting to tax both sales would avoid the exempt outputs. Of course, the input tax lost might be limited to that on the professional fees associated with the transactions and this might be below the partial exemption de minimis limit of £7,500 a year and 50 per cent of total input tax. However, that will depend on the full circumstances including whether any other related input tax has been incurred, such as on a purchase of all or a part of the site during the last ten years.
If the option is exercised on the first sale, 'Pre-Raphaelite' should make sure that this is not forgotten if the further one occurs. The usual points on notification to Customs, confirmation to the purchaser, etc. will apply. – A St John Price.
