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tax land CDT expert

Hello, My father has owned a plot of land for many years with nothing built on it. Recently he has had planning authorized to build a large house on it and the footings dug. He would like to gift me and my partner the land which we will then build the house to live in. After a year or two we plan to sell the house and move into a smaller one, also giving my father some of the money back. We are wondering who, how much and when CDT will have to be paid, and how to minimize this (also if IHT would come into play?) Also I believe we can claim back VAT on the build itself? Also any other tax pitfalls / scenarios we may have missed and how to minimize those. Regards, Tom

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    Hi Tom

    Thanks for posting a question on UKtaxadvisors.com

    Though the nature of the transaction appears simple, there are a number of tax issues to consider and these include:
    -Capital gains tax
    -Inheritance tax
    -VAT

    I will try to provide as much information as possible and if this is not enough to help you, please post a reply on this page.

    Firstly gifts other than cash have two tax implications – Capital gains tax and Inheritance tax. If your father is to gift you the land, he will be treated as if he has sold the land, and capital gains tax charged based on the market value at the time of gift. In addition if your father is to die within 7 years of giving the land, the gift is included in his estate for inheritance tax purposes and IHT charged if this estate is worthy more than £325,000 at 40% of the excess.

    If you are to acquire/receive the land and develop it and within a year or two you plan to sell the house and move into a smaller one, you may ended up being taxed as if you have a “buy & sell” trade (ie property developer) as opposed to property investors. This would mean that profits would be taxed as income as opposed to capital gains – and CGT annual exemptions cannot be claimed on disposal and income is taxed at a rate upto 50% unless capital gains tax which is taxed at 18%/25%. Usually the distinction between dealing and investing is relatively straightforward: a purchaser buying property to let out or live on a long term basis is an investor; someone buying property to build /refurbish then sell, whether resulting in a capital gain or not, will most likely be a trader – the main difference being intention. However there are also advantages of being treated as a trader if you put the land in a limited company where tax is only 20%. In addition the entire property value is exempt from IHT under ‘Business Property Relief’ (BPR) if you are treated as a trading business. Property investment, on the other hand, is fully chargeable at 40%.

    With regards to VAT the default position is that you should not be charged VAT the supplies when you are developing a new residential building. However it’s more complicated than that. Most services supplied in the course of construction of a residential building are zero-rated (ie no VAT charged). However you will need tell the suppliers that this is a new residential building. If you are charged VAT it’s difficult to recover it if you are not registered for VAT –therefore its best to tell the supplier first so that the supplier invoice does not include the VAT.

    If a separate supply of services in the course of construction of a residential building is provided by an architect, surveyor or other consultant or supervisor, then these are specifically excluded from zero-rating, and these are considered standard-rated and VAT charged at 20%. However, if such services are obtained under a ‘design and build’ lump sum contract, the liability of the supplies on the design element of the contract follows the liability on the build element. It may therefore be possible to zero-rate all of them all. Building materials supplied with such construction services and incorporated into the building in question will also be zero-rated, although materials supplied on their own will be standard-rated at VAT rate of 20%. I hope this is not confusing.

    Regards

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