Given the scope of recent announcements by Rishi Sunak in response to COVID-19, one could be forgiven for overlooking the content of this year's budget back in March. However, the changes in the budget to entrepreneurs' relief, and the implications of those changes for landowners and housebuilders, are worth further examination.

Of all the announcements made during the 2020 budget, a change to entrepreneurs' relief was perhaps the least surprising.

Albeit anticipated, the cut in the relief is expected to have repercussions for housebuilders, as landowners seek to protect their bottom line when selling land to developers. We'll be examining the nature of the changes, the consequences for landowners and the implications for housebuilders.

What is Entrepreneurs' relief?

Entrepreneurs' relief previously allowed individuals who disposed of certain assets to reduce the rate of capital gains tax from 20% to 10% on the first £10 million of their lifetime gains. The relief costs the Treasury over £2.5billion a year which is many times greater than anticipated when the relief was first introduced, and its demise had been rumoured for a while. Despite this, we did not see the relief given its coup de grâce in the 2020 budget.

Instead the relief continues in a diminished form. For disposals from 11 March 2020 onwards, the relief is limited to £1 million of lifetime gains.

For individuals who, at 11 March 2020, had concluded a contract but not yet completed the disposal of their assets, "anti-forestalling" measures may operate to limit the relief. The onus will be on the taxpayer to demonstrate that these measures don't apply.

What will this mean for landowners?

Entrepreneurs' relief can be claimed following the disposal of the whole or part of a person's business. It cannot be claimed on the disposal of the assets of a continuing business unless that disposal forms part of the sale of part of the business. Entrepreneurs' relief was commonly sought by landowners who disposed of their assets (land) to housebuilders, through the sale of whole or part of their business. It was thus common for agricultural landowners to claim entrepreneurs' relief upon the sale of an entire farm to developers, or through the sale of part of their farming business.

Following the changes to entrepreneurs' relief, a landowner selling part of their business with a chargeable capital gain of £2 million will now have to pay £300,000 in Capital Gains Tax, £100,000 more than would have been due to the Treasury before the budget. That said, a 20% rate of capital gains tax (CGT) is still historically relatively low.

If there is a dwelling or dwellings on the land that is being sold, or there has been a dwelling (s) on it in the past, during the landowner's ownership, the rate of CGT is 28% on some of the gain, so entrepreneurs' relief is even more valuable in these circumstances. The rules around what counts as a dwelling are complicated and specific advice should be taken.

What will that mean for housebuilders?

Following the 90% cut in the entrepreneurs' relief lifetime limit, landowners may reassess the profitability of selling off their land to developers as they seek to protect their own bottom line. Developers may face increased costs for land, as landowners try to offset the additional tax they may have to pay.

Although the cut in entrepreneurs' relief may have negative consequences for housebuilders, the 2020 budget also provides some good news for housebuilders, with the government setting aside £12.2 billion to spend on building affordable homes.

Other changes for landowners in the 2020 Budget

From 6 April this year, there are changes to the reporting requirements for disposals of residential property which will impact landowners. For disposals of UK residential property since 5 April 2020 UK resident individuals now must make a CGT return and pay any CGT within 30 days of completion of the disposal rather than make a submission by the end of the following January. This is subject to some exceptions, for example the sale of a property that qualifies for principal private residence relief and transfers between spouses and civil partners.

Landowners may be affected in sales to housebuilders where they dispose of land which used to be residential, or is residential in part, such as a farm containing residential property.

Sale of completed units by a housebuilder should generally be classified as a sale in the course of a trade, and so not subject to the new reporting rules.

It is too early to see the full impact for housebuilders on the cut in entrepreneurs' relief, but to receive further insights please subscribe to our housebuilding mailing list

For any specific questions please contact a member of Brodies tax, planning or real estate teams.


Graeme Leith