644B Relief from corporation tax in respect of income from dealing in residential development land

Summary

This section provides that income from the disposal by companies of residential development land is to be taxed at 20 per cent. While section 21A provides for a corporation tax rate of 25 per cent on profits from certain activities including dealing in or developing land, this section ensures that a 20 per cent rate applies to residential development land. The section ceased to have effect from 1 January 2009.

The 20 per cent rate is achieved by reducing, by one-fifth, the tax which is charged in accordance with section 21A on the income from disposals of residential development land. This applies whether the land is disposed of in the course of a trade taxable under Case I or the income is taxable under Case IV in accordance with section 643.

The first stage in the process is to determine the corporation tax charged at 25 per cent and to apportion this to income from dealing in residential development land. The tax attributable to such income is reduced by one-fifth.

Details

(1) The definitions provided for in this section are as follows:

“excepted trade” has the same meaning as in section 21A. This effectively segregates profits from construction activities from those attributable to dealing in land.

“residential development” and “residential development land” have the same meanings as in section 644A, which provides a 20 per cent rate of income tax on dealing in residential development land.

Excepted trades

(2)(a) Where a company carries on an excepted trade which includes dealing in residential development land, its corporation tax, in so far as it refers to trading income from dealing in residential development land is to be reduced by one-fifth. An excepted trade is a trade which is not taxable at the standard corporation tax rate but is taxable at a rate of 25 per cent. One category of excepted trade is a trade of dealing in land – but all construction activities are excluded.

The section sets out the computational rules to calculate corporation tax attributable to profits from dealing in residential development land. A two-step approach is required:

• (2)(b)(ii) the first step provides for the apportionment of corporation tax which is payable at the 25 per cent rate – this can apply to income chargeable under Cases III, IV or V and to income from an excepted trade (land dealing generally, mining and petroleum activities) – as between income of an excepted trade and other income taxable at the 25 per cent rate.
• (2)(b)(i) once the tax referable to an excepted trade has been determined, the second step provides for the corporation tax referable to the excepted trade to be apportioned between income from dealing in residential development land and other income of the excepted trade. This is done on the basis of receipts from disposals of residential development land and other receipts of the excepted trade. In making this apportionment it is specified that receipts from disposing of residential development land and total receipts of the excepted trade do not include any amount attributable to construction operations.

Tax on certain gains taxable under Case IV

(3)(a) The section also provides for a one-fifth reduction in corporation tax charged on certain capital gains arising from disposals of residential development land. The gains concerned are gains arising on disposals and transfers of land and property (such as shares) deriving their value from land and which, by virtue of section 643, are charged to income tax under Case IV of Schedule D. Section 643 aims to combat schemes and arrangements which are designed to remove profits from the scope of income tax under Case I of Schedule D. Under these schemes, such profits, if they are taxed at all, would otherwise be chargeable under the capital gains tax code and would from time to time be subject to a lower effective rate of tax. Section 643 applies to such transactions in land in general. The section provides that corporation tax is to be reduced only in so far as it relates to gains on residential development land.

The section sets out the computational rules. There are two steps involved in determining the corporation tax referable to a gain which is charged to tax as income under Case IV.

• (3)(b)(ii) Step 1 provides for the apportionment of corporation tax charged at the 25 per cent rate between income charged under Case IV by virtue of section 643 and other income charged at that rate. This is done on the basis of the amount of such Case IV income as compared with the total income taxable at the 25 per cent rate. Once this has been determined step 2 can be applied.
• (3)(b)(i) Step 2 provides for the apportionment of corporation tax referable to income chargeable under Case IV by virtue of section 643 as between such income as is referable to disposals of residential development land and other income so charged. The apportionment is done on the basis of the amount of gain attributable to the disposal of residential development land as compared with the total of such gains. In doing this calculation, the amount of gain attributable to the disposal of residential development land, is not to include any amount referable to construction operations. It is not necessary to make a similar exclusion in relation to the total gain because the total gain includes any gain on the land whether or not it includes anything referable to construction activities. What is required is to take the proportion referable to disposing of land, and only land, which is residential development land and to reduce the tax on that to an effective 20 per cent rate.

(3)(b)(i) Income charged under Case IV by virtue of section 643 will never be included in trading income taxable at the standard corporation tax rate. Consequently it will always be taxed at the 25 per cent rate (subject to the reduction under this section). Income from development activities such as demolition, installation of services and other preparatory work to residential development is included in the income to be taxed (effectively) at the 20 per cent rate. It is for this reason that the reference to construction operations is to such operations as defined in section 644A rather than the wider definition in section 21A.

(4) A company is allowed to disapply a part of section 21A in the case of income from the sale of residential development land arising in the year 2000. Section 21A generally provides for income from dealing in land to be treated as income of an excepted trade taxable at the 25 per cent rate. However, it also allows income from dealing in land which has been fully developed by a builder to be included in the builder’s trading income which is taxable at the standard rate of corporation tax. The standard corporation tax for 2002 and subsequent years is lower than the 20 per cent rate provided for by this section. However, the standard corporation tax rate in 2000 was 24 per cent, higher than the 20 per cent rate provided for by this section. Under this section companies were given the option for 2000 to disapply that part of section 21A which treats income from disposals of certain residential development land as being taxable at the standard rate of corporation tax. Where a company exercises that option, the income concerned is taxed at the 25 per cent rate with a reduction of one fifth of the tax concerned to achieve an effective rate of 20 per cent.

Termination of relief

(5) The section ceased to apply to an accounting period ending after 31 December 2008. Where an accounting period of a company began before 31 December 2008 and ended after that date it is to be divided into 2 parts one commencing before 31 December 2008 and ending on that date and another beginning on 1 January 2009 and ending on the date the accounting period ends and both parts shall be treated as if they were separate accounting periods of the company.

Relevant Date: Finance Act 2021