Land Remediation Relief

Land remediation relief (LRR) presents an advantageous opportunity for companies subject to corporation tax across various commercial property sectors. Unlike capital allowances, LRR is open to both property investors and developers, offering substantial tax relief. It can be a valuable resource for those looking to save on tax expenses.

There are two distinct rates of relief under LRR:

1. Owner Occupier/Investor Rate – 150%: This rate is specifically designed for UK companies and can lead to significant tax savings.

2. Developer Rate – 50%: Developers also benefit from LRR, allowing them to claim a 50% benefit on construction expenditure.

Additionally, for companies operating at a loss, LRR can provide a tax credit, putting cash directly into their hands. This tax credit amounts to 24% of the qualifying LRR for the accounting period.

Qualifying costs for LRR encompass a wide range of activities, such as remediating contaminated land, asbestos removal from buildings, excavation of buried structures, and the treatment of harmful organisms and naturally occurring contaminants like Japanese Knotweed, radon, and arsenic. These tax benefits are applicable to various types of projects, including developments, regeneration initiatives, fit-outs, and refurbishments.

One important aspect to note is the time limit for retrospective claims, which extends up to three years. This means that companies can still apply for LRR for qualifying expenditures made within the past three years.

Benefits of LRR are most pronounced when considering the 150% owner occupier/investor rate, as it can result in substantial cash savings for eligible UK companies. However, it’s crucial to actively claim LRR to maximize these savings, especially when assessing potential bids for projects.

It’s important to consider some conditions when claiming LRR. For companies holding property as an asset, such as a retail portfolio, the full 150% must be claimed in the year in which the expenditure was incurred. This can translate to a 30% saving (assuming a 20% corporation tax rate) on all LRR-eligible expenses.

On the other hand, for properties involved in trading, such as those developed by property developers, a 50% benefit is realized, as all construction expenditure (100%) is entirely written off in the profit and loss account. The excess over 50% LRR can only be claimed upon property disposal, resulting in a 10% saving (assuming a 20% corporation tax rate) on all LRR-qualified expenses.

There are some restrictions to consider when applying for LRR. Companies are not entitled to claim if:

• The land is in a contaminated state due to the claiming company’s actions.
• The claiming company does not have a ‘major interest,’ defined as freehold ownership or a lease of a minimum of seven years.
• The expenditure has been subsidized, such as through grant funding.
• The acquisition cost of the land was intentionally reduced to account for the cost of remediation works, as specified in the purchase agreement.

Derelict Land Relief, introduced by the Finance Act 2009, aims to reinvigorate abandoned sites and bring them back into productive use. Qualifying sites must be listed on the English National Land Use Database as derelict since April 1, 1998. Generous relief is available for activities like demolishing and preparing the site for redevelopment under this scheme.

Furthermore, companies can also consider the Land Remediation/Derelict Land Tax Credit. If a UK company incurs expenditure on remediating contaminated or derelict land while making a loss in an accounting period, it can choose to receive a payable credit from HMRC. This credit amounts to 16% of the qualifying LRR for the relevant accounting period, which, for investors and developers, translates to a cash return equivalent to 24% of the incurred expenditure (16% x 150%).

For completed developments, retrospective claims can be made for expenditures incurred within two years from the year-end in which the expenditure occurred. This allows companies to still benefit from LRR even after the project is completed.