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HMRC internal manual

Business Income Manual

Disposals of property deriving its value from land

Section 356OD CTA 2010 and Section 517D ITA 2007 set out the conditions which, if met, mean profits on the disposal of property which derives its value from land should be treated as trading profits. Section 356OD CTA 2010 and Section 517D ITA 2007 differ from condition B which applies where it is the land which is disposed of not the property which derives its value from the land.

All of the following conditions must be met for Section 356OD CTA 2010 and Section 517D ITA 2007 to apply:

  • A person realises a profit or gain from a disposal of any property which (at the time of the disposal) derives at least 50% of its value from land in the United Kingdom, and

 

  • The person is a party to, or concerned in, an arrangement concerning some or all of the project land, and

 

  • The main purpose or one of the main purposes of the arrangement, is to deal in or develop the project land and realise a profit or gain from a disposal of property deriving the whole or part of its value from that land.

 

Property deriving its value from land is widely defined and is set out at Section 356OR CTA 2010 and Section 517S ITA 2007. 

Where a company or individual are charged by virtue of S356OD CTA 2010 or Section 517D ITA 2007, they may not have started a trade prior to the point of disposal. If this is the case the obligation to notify will arise when the shares are disposed of.

 

Example 1

Company X owns 100% of Company Y. Company Y purchases a piece of UK land and carries out the development of a block of flats. Company Y has no other substantial assets so over 50% of the company’s value relates to the land. The intention of Company X is for Company Y to develop the land and to immediately dispose of their shares in Company Y when the land is developed. The land is not held as trading stock by Company Y. When the development is completed Company X sells the shares in Company Y to a third party.

In this example the disposal meets the conditions and is a disposal of property deriving its value from land.  The profits should be treated as trading profits of Company X. 

 

 

Example 2

Company X purchases 100% of the share capital of Company Y, whose only asset is a dated office block that is held on investment account. Company X purchased the shares in company Y to hold as an investment and yield income.

After a period of rental there is a change of intention and a decision to redevelop and sell the office block.  To carry out this disposal it is agreed Company X will dispose of its shares in company Y when the redevelopment is complete.

In this example there has been a change of intention and Section 356OL CTA 2010 will apply. Only the profit relating to the period after the change of intention should be taxed as a trading profit. The portion relating to the period where there was an investment intention should not be included in the tax calculation. 

Please see BIM60825 for details on apportionment.