Charities can find themselves with particular problems when they dispose of property subject to an overage clause, under which the present owner will profit from any development gain, even if no longer owning the land. There is a charge to corporation tax or income tax in some circumstances where gains of a capital nature are obtained from the disposal of land.

This legislation is an anti-avoidance measure to prevent profits from certain land transactions, which were in essence trading transactions, from being taxed as though they were capital gains tax transactions. The anti-avoidance legislation is widely drafted and charities often find that they are caught if they participate in what is commonly referred to as a ‘slice of the action’ contract.

Such contracts allow the charity (as a landowner who holds the land or property as an investment) to benefit from a share in the proceeds of any subsequent development by the purchaser. Typically, the charity would receive a sum at the time of disposal plus an agreed percentage of the sales proceeds for each building subsequently sold by the developer.

From the charity’s perspective, by entering into such a contract it is able to share in the proceeds of the developer’s trading activity. However, as the charity has not undertaken any trading activity in its own right, it cannot be assessed under the normal rules for trading profits and, therefore, the share in the proceeds is a capital receipt derived from the disposal of an asset. The tax that is due under these sections is not capital gains tax (which would ordinarily be covered by the charitable exemption for this tax); neither is the tax covered by other specific tax reliefs available – and the gain is therefore taxable.

The tax liability is not simply the amount received multiplied by the appropriate tax rate. The legislation provides for a restriction on the amount of the profit that can be assessed under corporation/income tax and takes out of the charge so much of the gain as is attributable to the period before the intention to develop the land was formed. In other words, part of income does not arise solely as a result of the development activity and therefore remains within the charge to capital gains tax (and thus probably within the exemption from capital gains).

It is therefore necessary to agree the value of the land with the District Valuer as at the date the intention to develop first arose; however, it is not going to be possible to do this while the transaction is in the planning stage. The result is that the charity in question is not going to have any certainty about its expected tax liabilities until agreement has been reached with the District Valuer and the total value of the contingent consideration is known.

It may be possible to mitigate a liability by transferring the property to a trading subsidiary when the decision to develop is made, and subsequently paying up the total profit by way of Gift Aid, although care needs to be taken over this more complex planning.