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Business Services  •  Business Tax

LRR: understanding property development tax relief for derelict or contaminated land

By RJP LLP on 29 April, 2019

According to the Mayor’s office, housing shortages mean that well over 60,000 new homes are needed in the London area every year.  Developers however face a number of obstacles, and with new land in scarce supply they are getting creative and looking more closely at brownfield sites.

Whilst this can be expensive, there is an attractive tax incentive available which can be overlooked - LRR.

Land Remediation Relief (LRR) is an enhanced tax relief available to property developers  operating through a limited company and effectively using (and clearing up) land that was not previously utilised for residential dwellings in order to provide new housing.  That’s the rough gist of the legislation, although the exact rules are a little bit more complex as this article explains.

The key thing to note is that it can be a valuable tax relief from a financial point of view in the right circumstances and so is well worth being aware of. It’s as relevant for developers looking for new sites as it is for land owners who may be wanting to sell but finding it difficult to secure a buyer due to the clean-up costs required.

LRR was first introduced in 2001, to incentivise developers to restore land that had been blighted by previous industrial use, to provide housing sites. It has been improved over the years and is now an enhanced tax relief that can be used to cover all the costs associated with cleaning up and bringing back into productive use land that has been blighted by long term dereliction – for instance, brown field sites.

 

How does LRR work?

It is valuable because it offers tax relief on both capital and revenue expenditure. This means that costs relating to the purchase of special equipment and use of specialist services to evaluate the situation or clear the land, can be enhanced and offset against the development company’s corporation tax liability. Demolition of buildings can also be included within a claim where appropriate. Up to 100% of qualifying expenditure is tax deductible, plus it may be possible to secure an additional deduction of 50%.

Land Remediation Relief works a little bit like R&D tax credits.  If an LRR claim results in a corporation tax loss, it may be possible to secure a tax credit for the element of the loss resulting from the claim. These tax credits are paid at 16% of the loss surrendered. This can provide an important boost to cash flow for development start-ups, or where the upfront expenditure is high at the start of a project.

 

Are there exclusions?

LRR is only available to companies, but this also includes corporate members of an LLP.

However, a company is not entitled to claim where any of the following conditions apply:

  • the land is in a contaminated state due to the claimant company;
  • the claimant company does not have a ‘major interest’ (i.e. owns the freehold or has a minimum lease of 7 years);
  • the expenditure has already been subsidised, for example by grant funding;
  • the acquisition cost of the land was specifically discounted in order to account for the cost of remediation works and stated as such in the purchase agreement.

 

What counts as land contamination for LRR?

According to HMRC and for the purposes of claiming LRR, land or buildings are considered contaminated if there is contamination present as a result of industrial activity such that:

  • it is causing relevant harm;
  • there is a serious possibility that it could cause relevant harm, or
  • it is causing, or there is a serious possibility that it could cause, significant pollution in the groundwater, streams, rivers or coastal waters.

 

Relevant harm” means having a significant adverse impact on the health of humans or animals, or damage to buildings that has a real impact on the way the building can be used.

The legislation includes associated costs involved in cleaning up arsenic, radon and Japanese knotweed, which is particularly prevalent in the Surrey area. Associated costs cover both establishing levels of contamination and removing the problems or containing the contamination to avoid ‘relevant harm’.

In some cases, a claim can also be made if the land is not in a contaminated state but has been left derelict for a long period and has existing buildings or structures that need to be removed before a development can take place.  Under these circumstances, LRR can be available for the removal for instance, of foundations and heavyweight concrete constructions, or obsolete building services like gas and electricity.  To qualify as derelict, the land must have been owned by the company and left unused either since 1 April 1998 or since acquired (for a minimum of seven years and already derelict).

Contact us to fund out more about accessing Land Remediation Relief and making a claim.

 

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31 December 2020 - Review disposals of chargeable assets to avoid a possible CGT increase

Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.