643 Tax to be charged under Case IV on gains from certain disposals of land

Summary

This section provides for a charge to tax under Case IV of Schedule D on gains from certain disposals of land or property (such as shares) deriving its value from land. The section aims to combat schemes and arrangements which are designed to remove profits from the scope of income taxation under Case I of Schedule D. Under these schemes, such profits, when they are taxed at all, would only be treated as capital gains and may be subject to a lower effective rate of taxation.

Provisions which are supplementary to this section are contained in section 644.

Details

Definitions and construction

(1) The term “capital amount” means any amount not treated as income for tax purposes. Other expressions which include the word “capital” are to be construed accordingly, for example, “gain of a capital nature”.

References to property deriving its value from land includes shares, partnership interests, or interests in settled property which derive the greater part (that is, over 50 per cent) of their value from land, and anything such as an option, consent or embargo which affects the disposition of land.

The definitions of “chargeable period”, “land” and “shares” are self-explanatory.

Exceptions

(2) The section does not apply to any gain by an individual on the disposal of his/her sole or main residence.

Application

(3) The section applies only where one of the following 3 conditions is satisfied and “a gain of a capital nature” is obtained from the disposal of the land —

• land or property deriving its value from land is acquired with the sole or main object of realising a gain from its disposal,
• land is held as trading stock, or
• land is developed by a company with the sole or main object of realising a gain on disposal after development.

The category of persons who is within the section is also set out by stipulating that the gain must be realised by —

• the person acquiring, holding or developing the land (or by any connected person – see section 10), or
• any person who is a party to, or concerned in, any arrangement or scheme regarding the land which enables a gain to be realised by any direct or indirect method or series of transactions.

In a case where the asset concerned is property deriving its value from land the subsection does not automatically catch a gain obtained by the owner of that property. In such a case, for example, where a person buys shares in a property-owning company and later sells them at a profit, the disposal is not caught unless the person is connected with the company or the gain is realised by means of an arrangement or scheme.

(3)(a) The commonest situation to which the section applies is where land (or property deriving its value from land) is acquired with the sole or main object of realising a gain from the disposal of the land, and a gain is in fact obtained —

• from a disposal of the land by the person acquiring the land or a person connected with the person acquiring the land, or
• from a disposal of property (such as shares) deriving its value from land by a person connected with the person acquiring the land, or
• from a disposal of either the land or property deriving its value from land by any person who is a party to an arrangement or scheme which is effected as respects the land.

The “sole or main object” requirement in both subsections (3)(a) and (c) ensures that a person who buys property or shares in a property-owning company as a genuine investment will not be chargeable under the section merely because the person subsequently sells at a higher price.

(3)(b) The circumstances in which a capital gain can be made where land is held as trading stock arise where the land is held by a company as trading stock and the shares in the company are sold by a connected shareholder. Any gain made on the disposal of the shares may be chargeable under subsection (3)(b). However, subsection (12) provides for a limited exclusion from liability in certain circumstances.

(3)(c) In a case where land which, although not originally acquired with the intention of disposing of it at a gain, is at a later date developed by a company with that object, subsection (10) comes into play so as to restrict the gain to the actual gain accruing in the period commencing on the date on which the intention to develop was formed. The “cost” of the land should be taken as its market value at the time when the intention to develop it was formed (provided that this is not lower than the actual cost).

Tax treatment of gains

(4) A gain which comes within the section is to be treated as income arising when the gain is realised and is to be charged under Case IV of Schedule D. This gain is normally to be charged on the person by whom it is realised. In certain circumstances the gain may be charged on some other person – see subsection (11).

Disposals of land

(5) For the purposes of the section, there is a disposal of land if the property in the land, or control over the land, is effectively disposed of either by one or more transactions or by any arrangement or scheme, whether such transaction, arrangement or scheme concerns the land or property deriving its value from the land.

Gains obtained by one person from another/multiple transactions

(6)(a) The circumstances of how a gain could be obtained by one person for another (see the concluding words of subsection (3)) are set out. The Oxford Dictionary defines “premature” as “occurring before the usual or proper time”.

(6)(b) Any number of transactions may be regarded as constituting a single arrangement or scheme so long as a common purpose is discerned in those transactions or there is other sufficient evidence of a common purpose.

It should be noted, however, that subsection (6) is not concerned with a genuine sale at low value by a person not involved in an arrangement or scheme.

Land disposed of by means of an arrangement or scheme

(7) This provision enlarges on the ways in which land can be disposed of by means of an arrangement or scheme. It specifies that account is to be taken of any method by which any property or right is transferred or transmitted or by which the value of any property is enhanced or diminished. The provision goes on to secure that the occasion of any transfer of property or any enhancement of the value of any property may be an occasion when tax may be charged under the section.

(8) Particular examples of schemes to which the above provision applies are —

• transactions made for less or more than full consideration,
• transfers of any property or right by means of assignments of share capital, partnership interests, or interests in settled property,
• the creation of any option, consent or embargo affecting the disposition of any property or right, and the giving of any consideration for the option or consent or the release from the embargo, and
• the disposal of any property or right on a winding-up, dissolution or termination of any company, partnership or trust.

Computation of gains

(9) Provision is made to authorise the use of any just and reasonable method of computing a gain which may be appropriate to the particular case. The value of what is obtained on the disposal is to be taken into account. Allowable expenses are to be restricted to those attributable to the land disposed of, and it will be a question to be decided on the facts of each case whether expenses claimed relate solely to the land disposed of or only partly to that land. In general, Case I principles, as applied to land dealers, are to be followed as far as possible – especially where an interest in land is acquired and the reversion (ground rent) is retained on disposal. In that event, the ground rents created, and any premiums on leases, are to be dealt with in the same way as they would be in Case I computations.

Land not originally acquired with a view to making a gain on its disposal

(10) Provision is made to deal with the case of land which, although not originally acquired with the object of making a gain from its disposal, is at a later date developed by a company with that object. In such a case, the gain chargeable under this section is restricted by applying the rules relating to Case I, and thereby ensuring that the land is deemed to have been purchased for a consideration equal to its market value at the time when the intention to develop was formed.

Gains provided for a person by others

(11) Where a gain is made by a person and that gain is effectively provided for that person by some other person, that other person is to be charged to tax on the gain. For example, if an office block is acquired by a person with the sole object of realising a gain and that person transfers the property to foreign trustees who subsequently sell it and realise the gain, the gain is chargeable not on the trustees, but on the person who transferred the property to the trustees.

Disposals of shares in companies holding land as trading stock

(12) Where there is a disposal of shares in a company which —

• holds land as trading stock, or
• owns directly or indirectly 90 per cent or more of the ordinary share capital of another company which holds land as trading stock,

then, if the land so held is sold by the company holding the land in the normal course of trading and all the opportunity to procure a profit in respect of that land arises to that company, this section will not treat any gain which might accrue to the holder of the shares as being a gain on property deriving its value from that land.

The final words in brackets in the subsection ensure that if there is any scheme or arrangement in relation to land held by the company at the time of the sale of the shares, the inspector is entitled to examine that scheme to see if any liability might arise under subsection (3)(ii).

Administration

(13) No document, memorandum or articles of association setting out the objects and powers of any person is to be conclusive in ascertaining the intentions of any person.

(14) In ascertaining whether and to what extent the value of any interest is derived from any other interest, value may be traced through any number of companies, partnerships and trusts, and the property held by any company, partnership or trust is to be attributed in a just and reasonable manner to the shareholders, partners or beneficiaries at each stage as may be appropriate.

(15) In applying the section —

• any amount may be apportioned by such method as is just and reasonable, and
• appropriate valuations are to be made to give effect to the section.

(16) Partners, or the trustees of a trust, or personal representatives, may be regarded as persons distinct from the individuals or other persons who are for the time being partners or trustees or personal representatives. For example, a trustee of a trust may be looked at either as such a trustee or as an individual in his/her own right where the occasion so requires.

(17) If all or any part of the land in question is in the State then the section is to apply to all persons whether resident in the State or not.

Relevant Date: Finance Act 2021