Land is being sold for £500,000 up front, £100,000 in 12 months - both of which are clearly capital transactions.
However, the buyer is a housing developer and intends on building a new estate on the land for completion in three years time with a profit estimated in the region of £10m - part of the agreement is that the seller will receive 20% of this profit as deferred consideration.
From what I can read on the revenue manuals and on here the nature of this transaction between income/capital all comes down to the wording of the orginal contract. Has anybody had any experience of such transactions in practice or point me to any previous cases along similar lines?
Many thanks
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Replies (5)
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Cost of advice
I am interested to know how much of the £2.6m your client may receive are they expecting to pay for the advice you are seeking?
I wonder with 61 reads and no responses are others thinking the same?
Marren vs Ingles
Does this not fall under the scope of Marren vs Ingles - ie that the right to receive future consideration based on a contingency should be valued and then added to the known disposal proceeds. When the 20% is received you will have a further capital gain. If it is not received you will have a capital loss.
Good point Steve!
Alan Kenendy
In a nutshell
yes, there is a potential problem that could mean an income tax liability and yes, it can boil down to contractual drafting. However, as mentioned that's very specialist advice for which your client should be willing to pay handsomely!
Andrew Gotch
TaxFellowship
Chose in Action
To quote from the VOA manuals; "A chose comprises real property and is defined in s136[1] of the LPA 1925. For the purposes of Corporation Tax on Chageable Gains it therefore may be treated as an asset. Although a chose is property it does not necessarily comprise an interest in land. It is generally taxable under the provisions of s22 [1] TCGA 1992 which relates to capital sums derived from assets. Alternatively where the asse disposed of is land and in particular where the sale proceeds are linked to its future development, then it is possible that the transaction comes within the scope of s776 ICTA 1988."
The cases are Marren v Ingles and Marson v Marriage, the valuation approach is specialist, I would suggest that the taxpayer gets expert advice; as the value depends on the exact circumstances of the case, to place a value on this asset. Currently I am working on a similar case and have done a number over the years.
Chris Hart
FRICS
It's all income
It looks as though you need a clearance under S.776 ICTA 1988/S.770 ITA 2007. If you need the clearance, you won't get it and it will ALL fall to be taxed as income.
But as suggested, you could pay a lot of money to find that out.