Tax treatment of clawback clause payment

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    Tax treatment of clawback clause payment

    I have a friend who's dad bought some land in 2000 for £6000 with the intention of possibly building on it. Unfortunately the dad died in 2006 and my friend inherited the land along with his sister and mother. He sold the land in 2008 to a developer and has a contract that apparently says if the land can be built on he will get £300,000 and he was paid £15,000 in 2008 with the rest supossed to follow if planning permission is granted.

    Personally i would not have done things like this for various reasons but this is the situation he is now in. The developer has recently contacted him saying he thinks permission to build a house is imminent and is now talking about paying out the money. The deal has changed several times, and not in his favour, and he is now looking at possibly getting a further £215,000 that will be split between 3 people.

    Each person is therefore possibly going to receive £71,000.

    Does anybody know the tax liability on this money. Would it fall under income tax or capital gains tax? The developer has refused to gift the money to them as he doesn't want his family to have to pay IHT on this money in the event of his death.

    To summarise, the developer promised everything to get his hands on the land etc, and moved teh goal posts once things were going in his favour. Pay day may be coming and my friend is worried he will have a huge tax bill as teh developer had assured him his way would be tax free but now it's looking not.

    Thanks in advance

    #2
    The first thing you need to check is what the value was put on the land for probate in 2006. I assume that is the figure which will be used to work out how much Capital Gains Tax you have to pay.
    I suggest you go to an Accountant and also get a Solicitor to look at how the deal has been reduced from £300.000 to £230.000.

    Comment


      #3
      This is a very interesting and extremely complex question. The land was clearly purchased as an adventure in the nature of trade, profits to be chargeable to income tax.

      However, the purchaser died.

      The beneficiaries - for a one-off transaction - are pretty unlikely to be deemed to be trading when an asset has been inherited. So it's capital.

      When did they make the disposal? 2008.

      What did they receive by way of consideration? Two things:

      1. £15,000 cash.
      2. The right to receive £300,000 at some point in the future.

      Therefore the sales proceeds were £315,000, albeit that some of the proceeds were not paid at the time, and the cost was probate value. So lots of cash due to HMRC in January 2009 or 10 (depending on when in 2008 the disposal happened), I'm afraid.

      When the cash arrives and is only £230k not 300k, then you resubmit the above tax return and claim a refund.

      Penalties and interest will be due on unpaid tax. Go and find an accountant to help you.

      Comment


        #4
        aside from the tax issues, this is not an unusual or bad type of deal - we have done them ourselves. You sell land with a "clawback". If a developer gets permission they have to pay you a large sum. I don't understand why you think it is a) a bad thing and b) why the deal has changed. It should be whatever was in the contract. What does it say?
        And tax is not payable surely until the end of the tax year in which the capital gain is made, so it would be declared on the tax return for 10/11 or 11/12 - why would interest be payable?
        This is a really common type of deal - admittedly complicated by a death etc but not at all unusual.
        Unshackled by the chains of idle vanity, A modest manatee, that's me

        Comment


          #5
          Originally posted by islandgirl View Post
          And tax is not payable surely until the end of the tax year in which the capital gain is made, so it would be declared on the tax return for 10/11 or 11/12 - why would interest be payable?
          NO! You're guessing at tax/hoping for the best neither of which is helpful. Because the disposal of land is in the earlier year, albeit that the cash is delivered sometime later. See these links (useful bits copied below to save you from clicking).

          http://www.hmrc.gov.uk/manuals/CGmanual/cg14885.htm
          http://www.hmrc.gov.uk/manuals/CGmanual/cg14886.htm
          http://www.hmrc.gov.uk/manuals/CGmanual/cg14883.htm

          The defining feature of ascertainable deferred consideration is that all of the events which affect the AMOUNT occur before the date of the disposal.

          Example of ascertainable but contingent payments e.g. the agreement for the sale of a piece of land provides for a consideration of £75,000, of which £50,000 is payable on completion and £25,000 is payable if planning permission is granted within two years of the date of the disposal.

          Payments which are ascertainable but contingent are treated in the same way as all other ascertainable amounts.
          Other ascertainable amounts are such things as CASH.

          Moral for future: don't structure things this way. Always ask an accountant before entering into a complex contract.

          Comment


            #6
            disagree, sorry. Excellent tax advice obtained at the time. Clawbacks are not complex at all. If the contract is a clawback you would pay when you are paid, so to speak. After all if development permission is not obtained you would never receive the money - most clawbacks are time limited eg 20 yrs. If as you say tax is payable immediately, you would pay tax on 200,000 but only receive say £15,000...
            Unshackled by the chains of idle vanity, A modest manatee, that's me

            Comment


              #7
              Telometer - only just seen your post - sorry I do have a life outside LLZone!
              I don't actually need to justify anything. Surely the OP would not base a decision like this on forum advice anyway. He has had my point of view. The OP needs high level tax advice (such as I obtained). I disagree that this type of arrangment is complicated or unusual. Why would you pay tax on £200,000 when you may never even get planning so would not receive the rest of the money - this does not make sense. I can only imagine you are talking about a totally different situation. Clawbacks are common. The kind I am talking about run for 25 years or more. Stay calm. OP - get advice!
              Unshackled by the chains of idle vanity, A modest manatee, that's me

              Comment


                #8
                No Telometer I am not guessing! I have given my point of view - that is, after all, what we are here for
                Surely you are not suggesting he just listens to you and does what you say based on a posting on an internet forum... you could be a noodle seller in Singapore or a Russian peasant for all he knows (as could I of course comrade)
                Unshackled by the chains of idle vanity, A modest manatee, that's me

                Comment


                  #9
                  Just taking a break from earning my roubles today -
                  Obviously it isn't just me who things these deals are common! From the Scotsman:
                  Clawback deals put the pep into property
                  16 August 2009
                  By Jeremy Watson
                  TO SOME it is just a place to live with the bonus of being sited in beautiful, tranquil countryside. To others the land they live on is the key to coining a future fortune.
                  House sellers who do not want to miss out on a cash windfall are now inserting "clawback" clauses in the sales contract to ensure they get a slice of the profits from any development deals on the property even after they have moved out.
                  Property agents say the trend is becoming more popular as house prices are deflated because of the credit crunch and the recession.
                  Cottages, farms, outbuildings and fields are all now being sold this way throughout Scotland in case developers buy properties for below previous price levels and then make a financial killing.
                  One property newly on the market on the banks of Loch Lomond will only be sold if the buyer agrees to pay the seller 25% of any increase in value gained from the granting of planning permission over the next 25 years.
                  Strutt & Parker, the selling agent, said such sales were likely to become more common among owners who want to sell now but realise the property could be worth more in future.
                  Some farmers are also hoping to cash in even after they have sold their land. A 154-acre plot of land at Maryfield, near Blairgowrie in Perthshire, is being sold to a buyer who has agreed to pay up to 50 per cent of the new value of the land if sold on or if planning permission is granted for development.
                  In the village of Kirkcambeck, just south of the Border in Cumbria, five Grade II-listed stone barns in the grounds of a Victorian country house were sold with the proviso that the previous owners would get 50% of any rise in profit achieved by gaining more lucrative planning permission for converting them to homes.
                  Gavin Maclean, the residential sales partner at property law firm Brodies, said the company had dealt with six residential properties in the past year in which clawback clauses had been inserted.
                  "This is common in the public sector when a school or hospital is being sold. The sellers are always worried about a developer buying it and then selling the site straight on to a supermarket for a big profit.
                  "But it is now becoming more common in the residential sector. It's a way of insuring yourself against selling at a low point in the market. If you sell and then a developer sticks six houses on there, or holiday lodges, then it ensures you get a slice of it."
                  "Alasdair Mackenzie, head of residential sales at CKD Galbraith, said clawback clauses were increasingly being used in properties with potential development land. "It is more likely to happen in rural than urban areas. There may be some people who feel they have lost out because prices have fallen."
                  Unshackled by the chains of idle vanity, A modest manatee, that's me

                  Comment


                    #10
                    Hi, thanks for the replies. As mentioned this is just for a bit of advice and of course my friend will seek professional advice when the time comes. The reason i wouldn't have done what my friend did is because i am a naturally cynical person and at the time the developer made the deal sound wonderful etc and told him his money would be tax free etc and he didn't seek proper advice at the time. Slowly now the deal has changed and unfortuantely he says a lot of the argreed things were verbal, not in the contract. My friend has been very naive but hopefully learnt a lesson. As the amount he was paid (£15,000) is relatively small to the amount it could be worth (£300,000) i would have prefered to keep the land in my name until planning permission was obtained etc.

                    He has been told that it may be possible to deal with the money under IHT but he is currently considering how/where to get professional advice.

                    ANyway, thanks for the replies on here, i believe all ideas/comments and discussion are of value.

                    Comment


                      #11
                      Thank you Jackboy. I agree - the forum is here to debate possible responses to a problem. Obviously your friend will need formal advice.
                      Good luck and I hope all goes well.
                      Unshackled by the chains of idle vanity, A modest manatee, that's me

                      Comment


                        #12
                        These deals are indeed common. And structured like the above they give tax headaches with a tax liability and no proceeds. The tax legislation around deferred/contingent consideration be it ascertainable or unascertainable is very complex.

                        Far better I think to have sold an option to purchase the property at a later date. That would have deferred the gain until the date of disposal.

                        Comment


                          #13
                          I agree it is a complex situation which is why I have said all along professional advice is needed. It may be that in this particular case a different method of purchase would have been preferable. However in cases I have been involved with the seller needed the money for the land at that point in time. An option to purchase would not have provided enough money. I think clawbacks are excellent and am clearly not alone in my thinking. I appreciate your viewpoint Telometer but think that they are sometimes the very best way forward.
                          Unshackled by the chains of idle vanity, A modest manatee, that's me

                          Comment


                            #14
                            Just so I understand your position, Telometer perhaps you could let me know the following -
                            In this case:

                            In the village of Kirkcambeck, just south of the Border in Cumbria, five Grade II-listed stone barns in the grounds of a Victorian country house were sold with the proviso that the previous owners would get 50% of any rise in profit achieved by gaining more lucrative planning permission for converting them to homes.

                            Say the 5 barns sold in 2010 for £100,000 as barns. Then 10 years later in 2020 (ignore inflation) the purchaser gets permission to convert them to houses. They are now worth £500,000. The original vendor is due £200,000. Are you saying the original vendor would have paid tax on the "extra" £200,000 in 2010 (ie that he would have paid tax on £300,000). How could he? The taxman had no idea if planning permission would be gained. He would have no idea how much barns with permission would be worth in 2020. I believe the tax would be paid in 2020 on a capital gain of £200,000. Am I wrong in your opinion?
                            Unshackled by the chains of idle vanity, A modest manatee, that's me

                            Comment


                              #15
                              I'm no tax expert but i think the point may be that in the case above the future profits were unknown. In my friends case the contract specified £300,000 so the deferred consideration was ascertainable but contingent.

                              Comment

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