What are the benefits of selling a ‘small’ amount of land?

Meg Saksida outlines a potential deferral opportunity for capital gains tax purposes. 

Land is an asset that, unlike (say) an antique bureau or a painting, can be sold off in several tranches. Land is, therefore, a perfect asset for those times when a landowner is down on their luck and needs a little cash injection but doesn’t want to sell the whole of their asset.  

Part-disposals of land 

However, a double-edged sword that arises when a taxpayer considers selling only part of the land.  

In these years of inflation, it is likely that the land will be sold at a price higher than the cost of the land, and if the landowner is a qualifying person for the purposes of capital gains tax because land is a qualifying asset, the disposal may attract a capital gain. If an individual’s gain is more than their available annual exempt amount (AEA) (£12,300 in 2021/22) or if the taxpayer has already exhausted their AEA, they will need to pay the gain out of the proceeds of the land, which may to a certain extent defeat the purpose. 

What is the solution? 

Hidden in the dusty corners of the Taxation of Chargeable Gains Act 1992, a little-known piece of legislation prevents this kind of gain from having to be paid.  

It is not an exemption but a deferral. Instead of having to pay the gain at the time of the sale, it is deferred until such a time as the rest of the land is sold, meaning that the full proceeds are available for the landowner to enjoy at the point of the sale. 

What are the conditions? 

As always, there are conditions that need to be satisfied to be eligible to make the claim.  

The first condition is that the proceeds of the part disposal of the land are only 20% or less than the value of the whole piece of land that the part disposal was made from. This ensures that it is only a small amount of land and a substantial part of the land is not being sold. 

The second condition relates to the other disposals made by the taxpayer in the year. If the landowner has already disposed of a significant amount of land in the year, enabling the claim would not be in the spirit of the legislation, so total land disposals in a year (including the part disposal in question) must be not more than an absolute value, set at £20,000. This figure has been unchanged since 1992 when the legislation was written, and in today’s money (on average) in the UK this will represent just over two acres of farmland (average prime arable land value being £8,800 per acre to December 2020 (Savills)). 

How does the claim work? 

If the taxpayer chooses to claim to defer the gain on the part disposal of the small piece of land, they will not be required to pay or report the gain in the tax year of the sale. Instead, to defer the gain, they will simply reduce the historical cost of the entire land from which the part disposal was made by the proceeds received for the small piece of land.  

Reducing the historical cost will increase the eventual gain. 

Case study: Part disposal of a field 

Gordon, a higher rate taxpayer, was a farmer and, amongst other land, had a 35-acre field on the outskirts of Bath. Being asset rich and cash poor, an unexpected tax bill caused him to decide to sell part of the field that he was not using. This, he hoped, would allow him to generate enough cash to pay HMRC. He had an offer for one acre of land for £7,500 in October 2021 which he accepted, and the sale completed in November 2021. He had purchased the field in 2004 for £200,000 and had never sold any of it before. The remainder of the field was worth £220,000 at the date of the sale. He had, however, part disposed of another of his fields during the year for £5,000. In 2022, Gordon received a generous offer for the remaining 34 acres of £250,000 and this sale went through on 13 June 2022. Gordon has no AEA left in 2021/22 or 2022/23. 

Tax year 2021/22 

Without the small land sale provisions, the capital gains tax calculation would be as follows: 

However, the small land sale provisions can be used if the conditions are satisfied, which they both are:  

(a) Gordon’s sale of £7,500 was not more than 20% of the combined value of the field at the time of the sale of £227,500 (£7,500 and £220,000).  

(b) Gordon did not receive proceeds for land during the year of more than £20,000. His total land sales were £5,000 and £7,500, totalling only £12,500. 

Gordon will therefore not need to submit a tax return for the disposal of the land. Instead, he can make a claim to use the small land sale legislation by 31 January 2024. This will change the base cost of the asset to be used on any future disposal. 

Tax year 2022/23 

In the following tax year, Gordon sells the land. The calculation will compare the proceeds with the new base cost. 

Note: the £11,500 is effectively the gain resulting from proceeds of both £250,000 and £7,500 (i.e., £257,500) less the unamended base cost of £200,000. We just go about it a different way. 

Administration 

The claim is not automatic; it needs to be lodged by the taxpayer by the second 31 January after the end of the tax year of the disposal.  

For example, if the land was sold on 12 November 2021, the claim would need to be made by 31 January 2024. 

Practical tips 

If only a small part of the land is to be sold, small part-disposal of land sales are a great idea to defer the gain until the future when the rest of the land is sold. Be careful if this future sale is in the same tax year. There will be no advantage in claiming to defer the gain if the future sale is in the same tax year anyway.