One of the biggest issues for property owners is capital gains tax, which can cut into the profits made over an extended period of time through investing.
However, you may not be aware of whether or not the sale of land is also susceptible to capital gains tax. In this article, we discuss the impact capital gains tax can have when selling land.
Do you pay Capital Gains Tax on selling land?
First and foremost, if you’re planning on selling your own home – including your garden – you do not have to pay tax on the sale up to 1.25 acres. However, if you’re planning on selling other types of land, you may be susceptible to capital gains tax.
A sale of land or property will usually invoke a capital gains tax (CGT). This is calculated as a set percentage of the sale price, with the purchase price and any qualifying improvement expenses removed.
The percentage paid in CGT varies depending on the nature of the selling entity. For example, in the event that an individual sells undeveloped land, the gain is taxable at 20% rather than the 28% CGT rate seen on the sale of developed properties (since the land hasn't been developed).
On the other hand, if the entity holding the land is a company rather than an individual, the tax amount shifts due to different legislation. In this case, any capital gains are taxed at the same rate as corporation tax, currently standing at 19% in the UK as of the time of writing.
Are there any ways of reducing the tax burden?
The way that taxation works means there are some ways available to land investors that can increase the profitability of land by reducing the tax burden. This requires planning in advance and varies depending on the nature of legislation at the time of reading this article. Policies regarding tax can change, and a single UK budget announcement can potentially change tax amounts significantly.
One way of reducing the tax burden is by setting up a business for trading land and properties. This is because the tax rate of capital gains differs from that paid by the individual to that paid by a corporation, as individuals pay 20% tax on their capital gains compared to companies paying 19%.
This seems like a minimal gain, but each and every minimal gain in the world of finance adds up. An example of comparing capital gains tax and corporation tax in terms of land sale can be found below.
An example of taxation in selling land
Jonathan bought his plot of land for a value of £100,000. In the time since purchase, Jonathan spent a total of £20,000 on increasing the value of his land, increasing his investment in the plot of land to £120,000.
Market demand shifts mean that he sells the land for £220,000, leaving capital gains of £100,000.
As an individual, Jonathan pays 20% of this (£20,000) in capital gains tax, leaving Jonathan with £80,000 in profit.
On the other hand, Sarah bought the adjoining plot of land, also for the value of £100,000. Sarah matched Jonathan's investment of £20,000 (for a total investment of £120,000) and then sold her land for the same final total of £220,000.
Initial profit on the transaction remains £100,000, although Sarah bought and sold her land through the company she built to process her investments and transactions. In this case, Sarah pays only 19% tax on the profit, giving £19,000 in capital gains tax and keeping £81,000 for herself.
This difference is quite small proportionally, but if you're a business that frequently deals in land sales then it can be beneficial. The extra £1,000 Sarah saves by operating through a company is further investment funding for future land purchases, and her portfolio increases over time as a result of her planning the purchase and sale ahead of time.
Make the most of selling your land with NFC Homes
If you're looking to sell your land for the optimal value, consider NFC Homes.
We have a wealth of experience in trading both homes and land, providing a fully informed and reliable land acquisition service you can rely on. Thanks to our years of work in the industry, our friendly team works with you in a helpful and reliable manner.
Contact us today to arrange a free, no-obligation quote for your plot of land.
Disclaimer: The contents of this article are for information purposes only. We strongly recommend seeking professional advice before making any decisions regarding the sale of your land.