How will your ‘slice of the action’ be taxed?

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‘Slice of the action’ contracts are so called because they confer upon a landowner (who holds the land as an investment) the right to share in the proceeds of any subsequent development by the purchaser. In these cases, the contract for sale of the land to a builder or developer provides for consideration that is, in whole or in part, contingent upon the successful development of the land.

A common arrangement is for the landowner to receive a fixed sum at the time of the disposal, plus a percentage of the sale proceeds of each building subsequently constructed by the purchaser on the land. [BIM60350]

‘Slice of the action’ clauses are also known as ‘Overage’ and ‘Uplift’ they are subject to anti avoidance rules because an advantage could be gained by the land owner being tax on the ‘slice of the action’ as a capital gain instead of being tax on it as trading income. There could be a difference of 25% tax between the treatments!

Often the vendor and their legal advisers are unaware of the anti-avoidance provisions for transactions in Land.

The provisions are drawn in very wide terms. Therefore, it is not possible to provide a summary of all the situations in which the rules are applicable, although there is a list of cases in which the rules should be considered in BIM60337.

There are, however, two common situations in which the rules are regularly invoked:

  • diversion schemes (see BIM60345)
  • ‘slice of the action’ schemes (see BIM60350)

Its important that starting with the Heads of Terms the legal documents clearly show the intentions of the parties.

There is a formal clearance procedure available for taxpayers who think that these rules may apply to a proposed transaction or a transaction that has already taken place (see BIM60395).

HMRC must give the applicant a decision on the transactions in land clearance within 30 days. Therefore, any clearance applications received should be identified as such and sent to the Clearance and Counteraction Team for consideration as soon as possible.

Once HMRC give a clearance, the transactions in land provisions cannot be invoked in respect of that disposal in relation to that taxpayer.

In a ‘slice of the action’ contract (see BIM60350) the following legislation is normally relevant:

  • S756(3)(d) ITA 2007 for individuals, trustees and personal representatives
  • S819(2)(d) CTA 2010 (for companies)

Where either of these subsections is in point, part of the overall gain may be exempted from the transactions in land rules. The effect of the exemption is to take out of the calculation of the income to be charged so much of the gain as is attributable to the period before the intention to develop the land was formed. In other words allowing the gain to be taxed as a capital gain.