Compulsory purchase of land and Capital Gains Tax

Landowners who receive compensation from a Compulsory Purchase Order (CPO) need to be aware of the tax issues they could face.

The loss of land for a new road scheme can be extremely stressful and significantly affects farmers and landowners in several ways. There are many things to consider, including Capital Gains Tax (CGT), and legal or valuation issues.

When it comes to legal or valuation issues, separate specialist advice needs to be taken. However, one important point to note is that payment may be awarded for a reduction in the value of the property you have retained, as well as for land sold.

Capital Gains Tax issues around CPOs

Ordinarily, the sale of land is voluntary, and the tax consequences are known before the transaction is entered into. However, with land sold under a CPO, a sale is involuntary, and so would be subject to Capital Gain Tax on the proceeds received. The rates of CGT on land and other assets increased on 30 October 2024 from 10% to 18% (basic rate) and from 20% to 24% (higher rate) and were brought in line with residential property rates.

However, the tax system affords some relief to land sold under a CPO, or under the threat of CPO, in the form of ‘Rollover Relief’, which is similar, but crucially different, to that available to all trading businesses. Rollover Relief allows CGT to be deferred by reinvesting the proceeds into qualifying assets.

Normally, it is only available for “qualifying assets” used in a trading business, and where both the asset sold and purchased are on the list of “qualifying assets”. In a farming context, these are land, buildings, and fixed plant and machinery. The deadline for reinvesting the proceeds is three years after the date of disposal.

However, the Rollover Relief rules are different when land is sold under a CPO or to a body holding CPO powers. The key differences are: -

• Proceeds must be reinvested in “new land”. This means that improvements to existing land or buildings do not qualify.
• The date of disposal is when the amount of compensation is agreed not when the asset is sold.
• The new asset does not have to be used for business purposes.
• A dwelling house can qualify for relief but not if it becomes the vendors main residence 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.
• CGT is due for payment on 31st January following the end of the tax year. If the replacement asset has not been purchased at this point, a provisional rollover claim can be made if the landowner is certain they will buy a qualifying asset.

It is important to note that when the new asset is sold, the rolled-over CGT will need to be paid unless the gain can be rolled over into further new assets.

This is an extremely complicated area of tax and specialist advice needs to be taken at an early stage to ensure you get the correct treatment and don’t suffer tax unnecessarily.