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HMRC internal manual

Business Income Manual

Transactions in land: Common situations: 'Slice of the action' contracts: Portion of charge may be exempt: Example

S765 Income Tax Act 2007, S827 Corporation Tax Act 2010

In a ‘slice of the action’ contract (see BIM60350), the effect of the exemption from the transactions in land rules discussed in BIM60360 can be significant. Normally, it removes an amount equal to the value of the land at the first intention date from the calculation of income chargeable to tax under those rules.

Consider the tax treatment of the following payments in a ‘slice of the action’ contract:

  • the initial fixed payment is £1m,
  • the total contingent payments are £0.5m, and
  • the first intention date value is £1.2m.

The amount excluded from the calculation of the chargeable income is £1.2m. The amount of income subject to Income Tax or Corporation Tax is £0.3m: the total payments received (£1.5m) less the value of the land at the first intention date (£1.2m).

If, exceptionally, the first intention date value is less than the fixed initial payment, the amount of the gain taxed as income is the entirety of the contingent payments. The fixed initial payment is not within the calculation of the income since it is not contingent upon the development.