Land disposals by charities – the potential for a tax charge.

Staying with the theme of maximising the value of a charity’s assets, we remind charities of additional steps they may need to take on property transactions with developers.

Charities need to be aware of the potential application of a tax charge where a capital gain is obtained on the disposal of all or part of the land. The gain is liable to be taxed as income either for corporation tax or income tax purposes and the intention of the legislation is to target the avoidance of income tax in what are essentially transactions in land trading.

Charities are not automatically exempted from the charge which can arise, typically, where a charity sells land to a developer who develops the land and there is reserved to the charity an entitlement to a further payment (commonly referred to as overage) related to the sale prices achieved by the developer of completed units. It can also apply, for example, where disposal occurs on completion of the development and there is a sale back or lease back of some completed units to the charity.

Where a proposed disposal may give rise to a charge, there is a clearance procedure whereby the charity provides written particulars to HMRC of the proposed disposal and notification must be given within 30 days by HMRC of whether there would be a tax liability on the gain arising from the disposal. Care needs to be taken in the structure of a disposal especially where the gain includes or consists of the retention of part of the completed development. Again, it is possible to structure receipt of overage so that it does not give rise to a charge but the justification for the structure must be explained to HMRC. Provided full disclosure is given a notification by HMRC of no tax liability means that the legislation cannot subsequently be invoked in respect of the disposal by the charity.

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