There are Capital Gains Tax (CGT) consequences to consider when land is sold under a Compulsory Purchase Order (CPO). I won’t cover the legal or valuation issues arising here, other than to say that separate specialist advice needs to be taken. One important point to note is that payment may be received for a reduction in value of property retained as well as for assets sold.
Ordinarily, the sale of land is voluntary and the tax consequences can be taken into account before the transaction is entered into. However, with land sold under a Compulsory Purchase Order, a sale may be involuntary and this is recognised by the tax system. This is by way of a form of rollover relief, which is similar but crucially different to that available to all trading businesses. This means that a farmer in receipt of money for land sold under a CPO has two different ways of deferring the CGT payable. We will first look at the normal rules, then highlight the differences applying to compulsory purchase, before finishing with some examples.
Normal Rollover Relief rules for sale of land
Only available for assets used in a trading business, although partial relief is due where an asset is partly used for trading purposes.
Only available where both the asset sold and purchased are on the list of qualifying assets. In a farming context these are land, buildings, fixed plant and machinery, and BPS entitlements.
The date of sale for CGT purposes is when an unconditional contract is signed.
The deadline for reinvesting the proceeds is three years after the date of disposal. It is also possible to rollover capital gains against assets acquired in the year before the old asset is sold. It is possible to extend the time limits where it was not possible to acquire assets within the normal limits.
HMRC accept that purchasing a further share in an asset, or expenditure on improving an asset qualifies for Rollover. Thus constructing buildings on land already owned can qualify for relief.
The capital gain is deducted from the cost of the new asset. This means more CGT is payable when the replacement asset is sold.
Rollover Relief rules for Compulsory Purchase
Available where land is sold under a CPO or to a body holding CPO powers.
Proceeds have to be reinvested in “new land”. This means that improvements to existing land or buildings do not qualify under this part of the legislation.
The date of disposal is when the amount of compensation is agreed.
A dwelling house can qualify for relief but not if it becomes a person’s dwelling at any time during the next six years.
The landowner must not have taken any steps to dispose of the land, or made their willingness to sell known to the authority with CPO powers.
Example 1
A farmer receives £100,000 for land taken for road widening. The land has always been used in his farming business. Replacement land is purchased six months later for £120,000 which is immediately used for business purposes.
In this case, Rollover Relief can be claimed under either the normal or CPO rules.
Example 2
The facts are the same as example 1 except that a residential property is purchased for £120,000 to be rented out.
Relief is not available under normal Rollover rules as the new asset is not used for business purposes. However, provided the new property is not used as the farmer’s main dwelling, relief can be claimed under CPO rules.
Example 3
The facts are the same as example 1 except the farmer spends £120,000 constructing a new dairy building on land already owned.
Rollover relief is due under normal rules but not under CPO legislation. Buildings constructed on land already owned do not count as “new land”.
Example 4
This time the proceeds are reinvested in converting an existing farm building to be rented out as commercial units.
Rollover relief is not due under either part of the legislation. Renting out commercial units is not business use under normal rules, and as in example 3, the expenditure does not count as “new land” under CPO legislation. Had the commercial units been constructed on newly purchased land, then rollover would be available under CPO legislation.
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