Dealing in Land

Table of Contents

Context

Prior to the enactment of capitals gains tax legislation, a capital gain from land was entirely untaxed. Even after the introduction of capital gains tax, the CGT rate was significantly lower than the income tax rate. The rates have since converged, although the CGT rate remains below the higher rate of income tax and is not subject to the levies.

There has long been special legislation dealing with the application of income tax and corporation tax to gains from dealing in land. In this context, land refers to immovable property, and all interests in it. It covers land and buildings. A disposal may be an outright sale or the grant of a lease or other interest. There may be dealing or trading in land without any development of it. Development will usually be a hallmark of trading / dealing in land.

Trading Principles

Some holdings and disposals of land (real property) may be investment (capital) in nature, while other holdings may be of a trading nature. In the latter case, the holder deals in the land as a trade. The land is in the nature of stock or a current asset. Trading is subject to income tax or corporation tax on income) treatment.

The ordinary principles including the badges of trade apply in relation to the issue of whether or not there is trading in land. Trading in land will be readily found, where a person develops properties and disposes of units, particularly on an ongoing basis. The position is less clear where the transactions are irregular or there is a one off transaction.

Where property had been developed, there is deemed to be dealing in land, with few exceptions. Development is defined to mean construction, development, extension, alteration, reconstruction of buildings, carrying out of any engineering operations in or under a land or the adaptation of land for a materially changed use.

Deemed Trading I

The development land legislation brings within the income tax charge, further classes of disposals which might not generally be taxable as income on general principles. This includes the following;

where land was acquired with the object of or main objective of realising a profit on its disposal;
where land was held as trading stock or
where it is developed with the main objective of realising a profit on disposal.

The disposal of land includes

a disposal or transfer of any interest to another person
where the value of a property right is enhanced or diminished directly or indirectly to transactions, schemes or arrangements.

There is deemed to be a trading receipt on the release of debt..

Deemed Trading II

Legislation has sought to expand the scope of what is deemed to constitute trading so that cases of what might not be considered trading and general principles are deemed to be trading for the purposes of dealing land. The legislation deems certain transactions to constitute trading in land, which would not otherwise be trading.

There is deemed trading / dealing in land, if real property is acquired with the intention of selling it. Generally, this deemed to be trading, regardless of whether the land is fully disposed of. The disposal of an interest in the land, including sales, the grant of leases involving grant of a premium and the grant of an option are deemed trading.

Dealing in land is deemed to take place in this case where a person with an interest in land, disposes of it, or of any interest which derives from it. The person who secures the development of the land is regarded as the developer for these purposes.

A transaction or activities of a business of dealing in or developing land that would not otherwise be “trading”, are deemed trading, if they would be so regarded if every disposal of an interest in land were a disposal of the full interest in the land and the interest that is disposed of was acquired by the person in the course of the business.

Diversion

A property may be purchased for capital purposes in one context and may later be diverted for development for profit (which constitutes trading). There is deemed trading, regardless of whether the interest in land was originally acquired for a trading purpose or as part of an investment or capital asset in a business.

The grant of an option in relation to developed or development land, is likely to be dealing in land.

Not Trading

It is not trading in land

to grant a security interest
to grant a lease with no premium (rent only)

General trading principles

The general principles applicable to trades, apply to development land with modifications. Any consideration other than rent for the disposal of an interest is development income.

If land becomes stock (used in the trade of development) it remains so until the trade is discontinued. Where a trader in land acquires land other than for consideration, he is deemed to have purchased it for market value at the relevant date.

Where land is acquired prior to the commencement of the trade or it is not purchased for that purpose, he is deemed to have purchased it at market value on the date it is brought in as “stock” in the trade.

There is deemed to be open market sale price in the case of transactions between connected parties. There may be a connection on the basis of relationship or direct or indirect control. There is deemed a transfer / disposal where there has been a sale contract, gift or any other disposal of property, including transfers of rights in companies, partnerships or other interest.

Revenue Powers

The Revenue Commissioners have powers to direct a person to withhold tax at the standard rate where a non-resident is liable, in their opinion under the provisions.

The Revenue has power as to obtain information necessary for determining whether, in their opinion, the provisions apply. They may require details of any transactions or arrangements in which persons are involved which is material to liability.

There is an exception for professional legal advice. A solicitor need disclose no more than whether or not he is or was acting or not for a particular client, who he can be required to name.

There is a relief for cash flow purposes from the liability in the case of a sale and leaseback. The seller must retain a leasehold interest it acquires within 6 month after a full sale. It must not dispose of it (or any interest in it). The relief allows payment of the tax over nine years in equal instalment. The charge arises immediately if the seller ceases to retain or disposes of the leasehold interest, dies or is wound up.

Development land rate

From 2000 until 2009 a special rate of income tax and corporation tax applied to dealing in and developing residential development land. Residential development land was land that was zoned or having planning permission for residential development, or which was disposed of to housing authority or other housing entity. In effect, the capital gains tax rate applied and no further liability arose. The profits of the trade were taxable at 20%.

The rate did not apply to construction on and the physical development of the land itself. It was limited to profits and gains arising from dealing in or developing the residential land. Where on a disposal there is an element of construction, operational profits and development profit, they were apportioned and taxed at the standard rate (12.5% companies 40% marginal for persons).

The flat 20% rate was charged with no allowance or credits available. This relief was abolished in Finance Act 2009 and is the general income tax rate applies. Developing land is subject to the higher 25% Corporation Tax rate.

Losses from dealing in residential development land which would have qualified for the reduced rate, are restricted. Pre-2009 losses may only be claimed as tax credits at the 20% rate of income. Loss on termination of a residential development trade, may be set only, against income arising in that trade in prior years.

Former Windfall Tax

There was a 80% rate of tax on profits and gains (whether capital or income gains) from dealing and developing land, the extent that the profits or gains arise out of rezoning of land from 2010 to 2014. Rezoning is change in the zoning of the land under a development plan to permit development from non-development permitted status. It also applies to changes from one development land use to another.

A planning permission which materially contravenes the development plant and allows development was also subject to the special rage of tax. Losses on this category of income may only be set against profits and gains of such income.

Profits and gains attributable to construction operations of the land or on qualifying land was not subject to the higher rate. Qualifying land is

land disposed of to an authority under CPO powers where the Revenue Commissioners are satisfied that the disposal would not have happened but for the exercise of the powers;
land disposed of by a NAMA entity;
land less than an acre whose market value does not exceed €250,000 and does not form part of a larger series of transaction.

The 80% rate of income tax or capital gain tax on market value of land attributable to planning rezoning or planning permission ceased at the end of 2014. Thereafter the normal rules apply.

Release of Debts I

FA 2013 introduced provisions restricting losses claimed by persons who trade in developing land. Debts and interest on debts incurred for the purchase or development of trading land by individuals are not to be available to create or augment a loss if the debt concerned is wholly or partly released.

The amount released is to be treated as a receipt of the trade. Where the trade is discontinued, it is deemed a post-cessation receipt. The provisions apply only in respect of debt released or discharged after the commencement of 2013 Act. The release of debt is subject to income tax, Universal Social Charge and PRSI in the case of an individual.

In the above circumstances, an individual is not permitted to claim loss relief in relation to losses in carrying on the development trade and arising from deductions for either interest on borrowings employed for the purchase or development of land or for any reduction in the value of land held as trading stock, (i.e. write downs reflecting fall in value).

Unless the interest has been paid or the reduction in value has been realised under a disposal to a third party, the losses are offset only against income from the same trade in the current year.

Release of Debt II

Where an amount of any debt, which is incurred by the individual to fund the acquisition of land held as trading stock, is released, that amount is treated as a receipt of income in the year of release. Provision is made to ensure that the amount is chargeable even where the trade

has ceased before the time of the release. It is taxable as miscellaneous income, in the circumstances

Release includes waiver, forgiveness or agreement not to collect the debt. It also includes discharge from bankruptcy or pursuant to a personal arrangement. The relevant date is the date of discharge. The legislation applies to discharges after the Finance act 2013 becomes effective.

The provisions apply to individuals engaged in dealing in land but not to companies, less than half whose aggregate income is derived from developing land. It accordingly applies to part-time developers.

Release covers any form of debt forgiveness, whether formal or otherwise, including that associated with limited or non-recourse loans and the discharge of debt in the context of bankruptcy or insolvency.

Carried forward losses of the trade will be available to reduce or eliminate any tax charged which may arise as a result of this measure. This provision applies to any such debt released on or after 13 February 2013.

Loss Relief

The loss relief provisions apply to an individual in any particular year, if less than 50 per cent of his/her total income (for USC purposes) for that year and the 2 previous years derives from dealing in or developing land.

It applies as respects losses created by trading deductions on foot of

interest payable on loans taken out to acquire land held as trading stock
deductions attributable to any write-down of the value of such land in an individual’s accounts
loss on the sale of land to a connected party.

Loss relief may not be claimed, unless the interest in question has actually been paid or the decline in land value has actually been realised by way of a disposal prior to the claim being made.

Provision is made to set the order in respect of which deductions and payments are deemed to be made. This provision applies to any interest expense incurred or any write-down in land value, which takes place on or after 13 February 2013.

Losses carried forward can be carried forward against income of the same trade in the usual way.

In addition to specific provisions restricting loss in the case of development and other trading, general provisions restrict such loss which are set out in other sections. Partners who are not active partners or who are limited partners are restricted under general rules from setting off losses from the partnership against their total income.

Anti-avoidance

Anti-avoidance provisions apply where land or property (e.g. shares) deriving its value from land

is acquired with the sole or main object of realising a gain on disposal,
held as trading stock
developed by a company for the sole domain object of realising a gain from disposal when developed.

If such land is disposed and a gain is made if either their land (or shares deriving its value from land) is disposed of whether as a result of scheme of arrangement or one or more transactions then there is a charge to income tax under the miscellaneous income category if the gain is obtained from disposal by the person acquiring holding or developing the land or a connected person or person part of an arrangement or scheme allowing for the land to be realised.

Some exceptions apply.The purpose is to treat such arrangement as an income gain rather than a capital gain.