Opting to tax on development land sales

Tax planning surrounding the sale of land for development tends to be focused on minimising Capital Gains Tax, and rightly so as the amounts of tax at stake can be very significant. However proper consideration should also be given to VAT.

It is probably best to start by explaining the default position. Normally sales of land are an exempt supply for VAT, meaning no VAT is charged on the sale, however this does mean that recovery of any input VAT on sale costs will also be blocked (unless within the de minimis limits). The way to offset this is to opt to tax’ the land, charge VAT on the sales price as a standard rated supply and then reclaim all input VAT on sale costs.

Sale costs can be very significant, especially if a fee is due to a land promoter who will typically charge a fee based on a percentage of the sales price achieved. If for example a promoter was due a 20% fee on a £2m sale, the input VAT at stake would be £80k (£400k at 20%).

From the buyer’s perspective, opting to tax will add 20% to the purchase cost and any Land and Building Transaction Tax (LBTT) due will be based on the gross price. However, the buyer will normally be able to fully recover the input VAT as they will be making zero rated supplies of new houses. The sales price might be slightly discounted if there is an option to tax in place as the developer will have to finance an extra 20% of the cost short term and pay a little extra LBTT. Nevertheless, any small reduction in the sales price could easily be outweighed if the seller is able to achieve full recovery of input VAT on sales costs.

Our advice to sellers of development land is to look at the tax position in the round. Depending on how the deal is structured there could be significant amounts of input VAT that will not be recoverable unless an option to tax is in place before the sales contract is concluded.

If you would like support with sale of agricultural land, please contact a member of our EQ Agriculture team via agriculture@eqaccountants.co.uk or call 01307 474274 / 01334 654044.

Alternatively, if you would like more information on any tax related issues, please contact our EQ Taxperts.