The disposal of an interest in land may give rise to a chargeable gain or an allowable loss. Although in many respects the calculation is as for other assets, there are some special rules that apply to land.
What is land?
From a legal perspective the definition of land includes all buildings situated on it, all fixtures attached to it, any minerals below the surface and the air space above it. However, the general premise that land includes the building situated on it is over-ridden for certain capital gains tax (CGT) purposes, including roll-over relief, compensation and insurance receipts applied in the restoration of an asset and the rules governing assets lost or destroyed or of negligible value.
Interest in land
A CGT liability may arise where there is a disposal of an interest in land. There are various ways in which an interest in land may be held. Although ultimate ownership of land in the UK rests with the Crown, land may be held by tenure, of which there are two types in the UK – freehold and leasehold. A person’s interest in the land is measured by an estate in land. A ‘fee simple estate’ is broadly equivalent to outright ownership, a ‘life estate’ entitles the holder to occupy and use the estate for the duration of his or her life, but on death no interest passes to his or her estate, and a ‘leasehold estate’ allows a person to occupy and use the land for the period of a lease. A person who holds an estate in land can grant a lesser estate to another person. For example, the holder of an estate in fee simple can grant a life estate or a leasehold estate. At the end of the life or term of the lease, the land reverts back to the original owner (the ‘reversionary interest’). Other lesser interests that may be granted include licences, easements and ‘profits-a pendre’.
Land may also be held in trust. The trustees hold legal title to the land on trust for the beneficiaries.
Land may also be owned by more than one person. There are two types of joint ownership – ‘joint tenants’ and ‘tenants in common’. Broadly, joint tenants jointly own all the land together, whereas tenants in common solely own their fractional share. This is an important distinction.
As well as establishing the legal owner of the land in question, it may also be necessary to determine the beneficial owner. It is the beneficial ownership that is relevant for CGT purposes. On the conveyance of land, the legal owners are those whose names are shown on the conveyance.
However, there is no single factor that determines beneficial ownership and each case must be considered on its facts. HMRC list the following indicators of beneficial ownership in their Capital Gains Manual (at CG70230):
•holds legal title;
•occupation of the land;
•receives any rental income from land;
•provided funds to purchase the land;
•received proceeds from sale of the land.
In the absence of information to the contrary, the legal owner is assumed to be the beneficial owner.
In order to work out the gain or loss arising on the disposal of an interest in land, it may be necessary to value the interest in the land. Valuation of land for CGT purposes include any buildings standing on the land and the value of any fixed plant or machinery.
The Valuation Office Agency is an Executive Agency within HM Revenue & Customs (HMRC). It provides valuation and related services to HMRC. Where a valuation is obtained from the Valuation Office Agency this is the valuation that is used to calculate the tax liability. However, there are certain circumstances in which HMRC will accept small land valuations without recourse to the Valuation Office Agency.
The main circumstances in which a valuation will be required in order to calculate the gain or loss are where:
•the land was owned at 3 March 1982;
•the disposal was by way of a bargain not at arm’s length;
•the disposal was to a connected person;
•there has been a part disposal and the ‘alternative basis’ for calculating the allowable costs has not been used (see below).
There are several points to note.
Where there is a part disposal of land it is necessary to apportion the allowable cost of the land between the land sold and the land retained. The statutory rules require a valuation of the land retained. To avoid the need to obtain a valuation, HMRC will accept an alternative basis of apportioning the expenditure. Under the alternative basis the land disposed is treated as a separate asset and HMRC will accept any fair and reasonable method of apportioning the allowable expenditure.
In relation to land that was owned at 31 March 1982, the valuation should reflect the state of the land at that date, rather than be made on a like-for-like basis. For example, if the building work was undertaken after 1982 substantially enhancing the value of the land, the 31 March 1982 valuation should not take into account the subsequent building work. Similarly, if a property is sold with vacant possession but was occupied by tenants on 31 March 1982, the March 1982 valuation should reflect the tenancies, and vice versa.
Where property is jointly-owned, any valuation should reflect this. The valuation must reflect the individual’s share of the land. However, this is a case where the whole is greater than the sum of the parts and due to the difficulties inherent in selling a part share, the value of a part share is likely to be less than a proportionate share of the whole. For example where two people own a property equally, the value each individual share is likely to be less than 50% of the value of the whole property.
Where a valuation is used to work out the gain or loss on the disposal of an interest in land by an individual, an ‘X’ should be entered in box 35 on page CG2 of the capital gains summary page of the self-assessment tax return.
It is also necessary to provide details of the basis of valuation and whether it is based on the taxpayer’s own estimate or whether professional advice has been taken. Where a valuation has been obtained from HMRC (see below) this should be noted.
HMRC will refer most valuations of land or an interest in land to the Valuation Office Agency to check unless the valuation falls within one of the exceptions listed in the Capital Gains Manual at CG74050.
Free valuation check
Where a CGT computation relies on a valuation, HMRC offer a free valuation check. The service is available after the disposal has been made and prior to the completion of the tax return. It is not possible to obtain a free valuation for a hypothetical transaction to check the tax consequences in advance as HMRC will not supply these.
It is worthwhile taking advantage of this service as it provides a degree of certainty. If HMRC accept the taxpayer’s valuation they will not question that value when used in the tax return, unless there are relevant factors which have not been disclosed.
In the event that HMRC do not agree the taxpayer’s valuation, they will provide alternative valuations. Valuation Office values are professionally-qualified chartered surveyors. If agreement on the valuation cannot be reached, the taxpayer can appeal to an independent tribunal.
To take advantage of the valuation checking service it is necessary to complete Form 34 (see www.hmrc.gov.uk/forms/cg34.pdf). The completed form should be returned to HMRC at the address on the form, together with the information specified on the form and any other relevant information supporting the taxpayer’s own valuation.
HMRC suggest that a taxpayer allows at least two months to obtain a valuation check, and it may take much longer. It is therefore advisable to apply for a valuation check as soon as possible after the disposal.
Practical Tip :
Take advantage of HMRC’s free valuation checking service to obtain a land valuation after disposal. This will allow the gain or loss to be applied with certainty.