If a charity holds land as a capital asset then any gain on sale will constitute a capital gain. But, if the gain is applied for charitable purposes, it will be exempt from CGT.

The danger, of course, is that the transaction may give rise to a trading profit (eg if the land was acquired with a view to selling it for a profit then that can amount to a trade). Moreover, charities must be aware of the anti-avoidance measures in s776 ICTA 1988, which may well result in capital gains being treated as income.

When land is to be developed then the risks to the charity are either that it will be seen as ‘trading’ or that s776 will apply. Charities often enter into agreements with a developer who will then obtain the planning permission. Generally, to the extent that the charity receives sums equal to the value of the land with planning permission, HMRC will accept that these are outside s776 (unless it is trading income). But, a charity’s involvement in overage arrangements should sound s776 alarm bells. Thus, if there is likely to be a significant element of overage, the use of a trading subsidiary will normally be recommended.

The point about there being a trading subsidiary is that s776 does not apply to trading profits. The subsidiary can transfer all the profits to the charity by way of gift aid and eliminate tax on the sale proceeds. The profits must be paid under gift aid within nine months of the end of the accounting period in which they arise. Plus, there is a key non-tax benefit in that using a trading subsidiary with limited liability will shield the charity.

Precautions must be taken when transferring the property to the trading subsidiary. The charity must observe its duty to obtain the best reasonable price, and valuation advice will usually be essential. How is the trading subsidiary to fund the acquisition of the land (any loan from the charity has to be on commercial terms, and it will have to take a charge over the land)? Also, there may be VAT issues (although the option to tax is often exercised to enable the subsidiary to recover VAT on its related costs), whilst SDLT may prove a significant cost (trading subsidiaries to charities cannot benefit from the SDLT exemption given to charities – although it may be possible to carefully structure SDLT group relief). For a useful introduction see [2009] EG 22 August 60.