When is a compulsory purchase order (CPO) taxable?

The issue

Councils often use a legal power to issue CPOs to land owners in order to force them to dispose of their property at a forced price. In practice about 90% of CPO proceeds are paid upfront with the balance due when the final sum has been agreed by both parties. These negotiations can rumble on for many years. But when does the landowner have to pay capital gains tax in respect of any gains on disposal?

 

Tax implications

The tax legislation (TCGA 246) states that a CPO disposal takes place for tax purposes when ‘the compensation for the acquisition is agreed’. This can be quite helpful for vendors because it allows them to potentially sit on a large proportion of proceeds for many years without having a tax obligation. Sometimes it will be many years until compensation is finally agreed!

 

Sting in the tail

There are also rules that can allow CPO gains to be rolled into new property which is acquired between one year before and three years after the date of the CPO disposal. However if the compensation has not been agreed then there is technically no disposal. This paves the way for HMRC to seek tax when compensation is finally agreed and only allow rollover if the new property was acquired a year before or three years after this disposal date. Therefore CPO rollover claims are often technically invalid. HMRC do have power to extend time limits where appropriate but there can be no guarantees that they will agree to do this……..

 

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