641 Computation under Case I of Schedule D of profits or gains from dealing in or developing land

Summary

This section sets out the principles to be followed in computing the profits of a business of dealing in or developing land where the business is, or is to be regarded as, a trade or a part of a trade. Broadly, the treatment provided for is that any interest in land acquired by the trader is to be treated as trading stock and any disposal of an interest in land as a sale of trading stock.

Details

General rule

(1) Where a business of dealing in or developing land is, or is to be regarded as, a trade or a part of a trade, the general law relating to the computation of trading profits applies except in so far as it is modified by the special rule set out in this note.

Special rules

(2)(a) A disposal of an interest in land is to be treated as a disposal of trading stock and the consideration for the disposal, in so far as it is not rent (or a premium which is treated as rent under section 98), is to be taken into account as a trading receipt.

(2)(b) Any interest in land which has become trading stock of the trade is to continue to be treated as trading stock until it is disposed of or until the trade is discontinued. An example of the need for this provision might be a builder who, having taken a lease of an area of land, erects an office block which is disposed of by way of sub-lease for a premium and a rent. At this stage the builder might, in the absence of any special provision, be able to contend that the reversion had ceased to be a trading asset for the reason that it had been decided to retain the reversion as an investment and, in the event of a subsequent sale of the reversion, that the profit arising was a capital profit on the realisation of an investment rather than a profit of the trade. This provision secures, in the instance cited, that any profit arising on a sale of the reversion while the trade is being carried on is taxable. The provision also secures that a person trading as a speculative builder will not escape liability on profit arising on the sale of a house erected by the builder in the course of trade merely by reason of the builder having let the house for a period before selling it. Here again the trader might, in the absence of special provision, be able to claim that the property sold had ceased to be trading stock on letting and was being held as an investment.

(2)(c) Where an interest in land is acquired otherwise than for valuable consideration (for example, by gift or inheritance), its cost to the trader is to be taken as the market value at the time of acquisition. Market value is also to apply where the consideration (not being money or money’s worth) is one which cannot be valued, such as marriage consideration, an undertaking by the transferee, unliquidated damages and so on.

(2)(d) Provision is made to cover the possibility of a person selling in the course of a trade (for example, a trade of speculative builder) land which the person had acquired (by purchase or otherwise) before commencing to carry on that trade, or land which the person had acquired after commencing the trade but for some purpose unconnected with it. In such a case it might be inequitable that the cost of acquisition of the land should be determined, as the case might be, by reference to the price actually paid or the market value at the time of acquisition. Accordingly, it is provided that, in such a case, the person is to be deemed to have purchased the land for a consideration equal to its market value at the time of its appropriation as trading stock – a time which is to be determined in the light of the facts of the particular case.

(2)(e) Provision is also made to deal with a case in which, for example, a person engaged in a trade of dealing in or developing land might, in relation to a particular “estate”, grant a licence to a builder (perhaps an associated company) to go on to the land for the purpose of developing it and at the same time undertake to give, in due course, leases or sub-leases of developed sites to nominees of the builder. Any fee for the grant of a licence of this nature is to be taken into account as a trading receipt.

(3) In computing the trader’s profits, a deduction is not to be made in respect of any sum payable by the trader to secure the forfeiture or surrender of any person’s right to an annuity or other annual payment. However, the prohibition of a deduction is not to apply in certain circumstances, for example, where the payment arises under a testamentary disposition such as a will.

Where —

• (4) the right to an annuity is bought out by a person other than the trader,
• the consideration so paid is not a trading receipt of a land-dealing trade, and
• the trader subsequently buys an interest in the land,

then, the amount payable by the trader for that interest is to be deemed to be the amount which would have been expended if the right had not been bought out, and the excess of the cost of the interest over that amount is, for the purposes of subsection (3), to be treated as having been expended by the trader in buying out the right to the annuity.

The result is that the trader is deemed to have bought out the annuity and is not given a deduction unless the trader would qualify for such a deduction under subsection (3).

Provision is made for the making of apportionments and valuations for the purposes of subsection (4) by the inspector where necessary.

Relevant Date: Finance Act 2021