The Taxation of Compulsory Purchase Orders (“CPO”) – Get Off My Land!!!

The taxation of compulsory purchase orders (“CPO”)

Introduction

Is your land slap bang in the middle of HS2’s planned route?

Are you likely to be issued with a compulsory purchase order.

If so, what will the tax position be?

What is a compulsory purchase order?

A compulsory purchase order (CPO) allows certain bodies the ability to obtain land without needing to also obtain the consent of the owner. It may be enforced if a proposed development is considered to be in the public interest – as in our HS2 example or the construction of a new road.

Most CPOs are made under powers given to local authorities.

Where land is compulsory acquired then the land owner is legally entitled to compensation.

Taxation of compulsory purchase orders – timing of a CPO

The legislation makes special provision[1]for the timing of a CPO.

Where there is no contract, the disposal takes place when the compensation ‘is agreed or otherwise determined’. Of course, this recognises the fact that disputes may not be resolved for many years after title of the land has been transferred.

Compensation may be:

• A sum relating to the value of the land acquired,
• any reduction in the value of retained land; and
• any other ‘disturbance’.

From a legal perspective, any payment represents a single compensatory payment. However, as usual, it is not that simple when it comes to tax where an award is apportioned between its constituent elements.

Apportionment of compulsory purchase compensation

For tax purposes[2], a compensation payment is apportioned as follows:

• an amount for the land
• an amount for the disturbance; and
• an amount for the severances

The land

A payment relating to the value of land acquired is capital and subject to capital gains tax.

Expenditure is deductible from the value in the normal manner.

The disturbance

These may be payments such as compensation for lost profit, expenses of relocation and payments for lost goodwill.

Any sums that are taxed as income are left out when in computing gains[3].

As a general rule any element that relates to the failure to receive a sum that had it been received directly would have been treated as an income profit will itself be taxed as income.

Commentary in HMRC’s Manuals[4]is useful:

“The most common elements found in a ‘disturbance’ payment and their treatments, are as follows:

• Loss on stock. This is taxable as trading income.
• Temporary loss of profits. This is also taxable as trading income.
• Loss of goodwill. This is chargeable to Capital Gains Tax for individuals. For companies this is either chargeable under the corporate intangibles regime (assets created on or after 1 April 2002) or as chargeable gains subject to corporation tax (assets created prior to 1 April 2002), see CG68000P.
• Incidental expenses of a revenue nature. These are set against the relevant revenue expenditure, see BIM40130.
• Incidental expenses of a capital nature. These are set against the relevant capital expenditure under TCGA92/S50, see CG15288.”

Severance

Compensation for severance or injurious affection, which relates to falls in the value of retained land as a result of the acquisition, is also capital[5]and is deemed to be a part disposal.

In circumstances where:

1. the land acquired forms part of a larger holding;
2. the consideration is small; and
3. no steps have been taken to publicise a willingness to sell

then the transferor may opt to have the payment disregarded for tax purposes. Instead, the receipt is deducted from the base cost of what is left.

The rule of thumb here is that ‘small’ means 5% of the value of the original holding, or less than £3,000.

Taxation of compulsory purchase orders – form of rollover relief

 The legislation[6]also provides for a form of rollover relief. This relief is provided on wider terms than for the ‘normal’ version of rollover / replacement of business assets.

Firstly, there is no need for trade use and assets do not need to be within prescribed classes.

The proceeds or part of them must be used to acquire other land within the usual time frame (one year before or three years after the disposal of the old assets).

If you have any queries surrounding the taxation of compulsory purchase orders, or any other issues in relation to land, then please get in touch.

[1]TCGA 1992, s 246 

[2]TCGA 1992, s245

[3]TCGA 1992, s 37

[4]https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg72101

[5]TCGA 1992, s 245

[6]TCGA 1992, s 247