Residential Development Land - Corporation Tax

Introduction

The Finance Act 2000 introduced a 20% rate of tax in respect of income from dealing in residential development land. It applies for both income tax and corporation tax purposes. The legislation complements the 20% rate of capital gains tax for disposals of development land, the details of which are outlined in Tax Briefing, Issue 39 [March 2000].

This article details the income tax and corporation tax treatment which applies to the income of individuals and companies from dealing in residential development land.

Income Tax

For income tax purposes, the legislation [section 644A Taxes Consolidation Act 1997] takes effect from 1 December 1999. The profits of an individual earned after that date from dealing in residential development land will be taxed at the lower rate of 20%. The profits are ringfenced so that no offset for personal allowances and credits is possible. However, the taxpayer has the option of having these profits charged to income tax in the normal way thus allowing the offset of personal allowances and credits against the profits.

In any year the taxpayer may choose the option which best suits his or her circumstances. For example, in the unusual circumstances that a person dealing in land has not absorbed all of his or her personal allowances against other income, the person might choose to have the income taxed in the ordinary way.

Corporation Tax

For corporation tax purposes, the legislation [section 644B Taxes Consolidation Act 1997] takes effect for accounting periods ending on or after 1 January 2000. Where an accounting period of a company straddles 1 January 2000, the accounting period is split into two periods, one before and the other after that date.

The Finance Act 1999 introduced reducing corporation tax rates for trading income. The standard rate of corporation tax is 24% in 2000 and the rate will reduce by 4% per annum for 2001 and 2002 and by 3.5% for 2003 - giving a rate of 12½ % for 2003 and subsequent years. However, the 1999 Finance Act provides that trading income from dealing in land (other than so much of that income as is attributable to construction activities) is to be taxed at 25%.

Section 644B now provides that in the case of income from the disposal by companies of residential development land, the rate of tax will be 20% and not 25%.

Section 644A - Income Tax

A number of definitions are contained in subsection (1) of the new section 644A -

“construction operations” in relation to residential development land is defined. The effect of this definition is that development activities up to but not including the laying of foundations are included in the meaning of residential development land for the purposes of determining profits or gains to which the lower income tax rate (20%) applies.

“residential development” includes developments which are ancillary to the development and which are necessary for the proper planning and development of the area in question. Such ancillary developments would include shops, schools, churches etc.

“residential development land” is land which satisfies one of the following three criteria:

• Land sold to a housing authority, the National Building Agency Limited or an approved body for the purposes of section 6 of the Housing (Miscellaneous Provisions) Act 1992 provided that the land is specified in a certificate as being required for the purposes of the Housing Acts
• Land in respect of which planning permission for residential development has been granted, or
• Land which is zoned residential.

The definition follows exactly the description of residential land for the purposes of the capital gains tax relief.

Scope of the legislation - Income Tax

Section 644A applies to profits or gains which are:

• arising from dealing in or developing residential development land in the course of a trade consisting of or including dealing in or developing land, assessable under Case I, and
• gains of a capital nature from disposing of residential development land which, by virtue of section 643, are chargeable under Case IV.

Apportionment of income and expenses

A just and reasonable apportionment must be made of income and expenses of a trade as between dealing in residential development land and other activities by treating these two businesses as separate trades.

In computing the profits or gains to which the 20% rate of tax is to apply, no account is to be taken of any profits or gains which result from construction operations.

Example

John has been dealing in and developing land for a number of years. The following are his trading results for the year 2000/2001:

£100,000 of the trading income arises from dealing in and developing residential land after 30 November 1999 and the expenses relating to this income amount to £25,000. John is single.

The position for 2000/2001 is as follows:

Dealing in/developing residential land income

Other income

Total income tax due: £15,000 + £60,346 = £ 75,346

Election to have profits or gains taxed in the normal way

If a person so elects on or before the return filing date for the year of assessment (31 January after the end of the relevant year of assessment), section 644A shall not apply to those profits or gains for that year of assessment and the person will be taxed in the normal way.

Section 644B - Corporation Tax

A number of definitions are contained in subsection of the new section 644B –

“excepted trade” has the same meaning as in section 21A TCA 1997, that is, a trade of dealing in land (excluding construction operations), mining or petroleum activities.

“residentialdevelopment”and“residential development land” have the same meaning as in section 644A.

Scope of the legislation - Corporation Tax

The new section 644B provides for a 20% rate to apply to income of companies from disposing of residential development land. The 20% rate is achieved by reducing by one-fifth the tax which is charged at the 25% rate on disposals of land in accordance with section 21A TCA 1997. 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 TCA 1997.

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

Carrying on an “excepted trade”

Subsection (2) of section 644B deals with trading income taxable under Case I and with a situation in which a company carries on an “excepted trade”. An excepted trade is not taxable at the standard corporation tax rate but is taxable at a rate of 25%. One category of excepted trade is a trade of dealing in land - but all construction activities are excluded.

Computational Rules

The computational rules to calculate corporation tax attributable to income from dealing in residential development land are as follows :

Step 1

Apportion CT payable at the 25% rate - as between income of an excepted trade and other income taxable at the 25% rate (e.g. income chargeable Case III, IV or V).

Step 2

CT referable to the excepted trade is 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. Receipts from disposing of residential development land and total receipts of the excepted trade do not include any amount attributable to construction operations.

Example

Step 1

CT referable to income of an excepted trade is:

Step 2

CT referable to income from dealing in residential development land is:

This £50 is reduced by one fifth i.e. £10 to give £40 and an effective rate of 20% on the income from dealing in residential development land

Reduction of Corporation Tax on certain capital Gains

There is 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 TCA 1997 are charged to income tax under Case IV of Schedule D. Section 643 applies to such transactions in land in general.

Section 644B provides that corporation tax is to be reduced only in so far as it relates to gains on residential development land.

Computational Rules

The computational rules are as follows :

Step 1

Apportion CT charged at 25% 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 25%. Once this has been determined step 2 can be applied.

Step 2

Apportion CT referable to income chargeable under Case IV by virtue of section 643 as between such income as isreferable 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 of the amount of gain attributable to the disposal of residential development land, any amount referable to construction operations is excluded.

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 25% (subject to the reduction under section 644B).

Company may elect to disapply part of section 21A to achieve an effective rate of 20%

A company may elect to disapply a part of section 21A in the case of income from the sale of residential development land arising in the year 2000 to achieve an effective rate of 20%. Section 21A generally provides for income from dealing in land to be treated as income of an excepted trade taxable at the 25% 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 rate for 2001 and subsequent years will be equal to or lower than the 20% rate provided for by this section. However, the standard corporation tax rate in 2000 is 24%, higher than the 20% rate provided for by section 644B.

Accordingly, under this section companies are given the option in 2000 to dis-apply 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 will be taxed at the 25% rate with a reduction of one-fifth of the tax concerned to achieve an effective rate of 20%.