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The taxation of compulsory purchase orders (“CPO”)
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
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:
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
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.
These may be payments such as compensation for lost profit, expenses of relocation and payments for lost goodwill.
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.
“The most common elements found in a ‘disturbance’ payment and their treatments, are as follows:
In circumstances where:
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
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.