Derelict or contaminated land can pose a dilemma to developers and investors alike as the cost of regenerating it can turn a financially viable project into an unviable one.
However, savings are available from the Government keen to encourage the redevelopment of contaminated sites.
This tax relief applies to residential and commercial properties.
Tax breaks are available to both developers and investors who either bring derelict land back into use or clean up land contaminated as a result of industrial processes, or some natural contaminants. These tax breaks are often overlooked. By factoring in the land remediation relief savings into financial modelling at the bid stage, prospective bidders may be able to improve their bid accordingly.
The relief is available for investors in the year of expenditure, meaning it is particularly attractive to owners and occupiers as they will realise the benefit far quicker than other forms of tax relief. For developers the benefit is available when they sell parts or the whole of the site.
Land remediation relief (LRR) is available to companies but not partnerships or individuals. The company claiming the relief needs to carry on a trade or a property letting business. They will be entitled to claim a 150% corporation tax relief for revenue and capital expenditure on certain costs incurred in cleaning up the contaminated or derelict land in the UK. If the company makes a loss after these extra cost deductions, it can claim a tax credit equal to 16% of any LRR for the accounting period the claim relates to.
Contaminated Land is land whose contamination is causing or has the potential to cause harm to living organisms, pollution to controlled waters, damage to the ecosystem or significant damage or interference with buildings. Such contamination needs to have occurred as a result of industrial activity. In addition, LRR is also available where natural contaminants such as Japanese knotweed, arsenic and radon are found. However, the cost of cleaning up a nuclear site or burial ground will not qualify for LRR.
Asbestos removal may qualify for 150% relief
Derelict Land is land that has been derelict continuously since 1 April 1998 or has been derelict for a period of 10 years. Claimants must show they were not responsible for the state of dereliction and they are not connected to the party who caused it. No relief is available if the works are required to be carried out by law.
Qualifying Expenditure includes employee costs and materials, some subcontracted works and any fees incurred directly in relation to the removal or decontamination works. Qualifying costs include preparatory work such as investigating and assessing the land before some action is taken to prevent, minimise, remedy or mitigate the effects of the pollution causing the contamination. However, no relief will be available where for example exploratory works established no asbestos was present.
The polluter pays rule means the land has to have been acquired in a contaminated state by the claimant company. The claimant company must not have caused the contamination by anything it has done or omitted to do. Therefore, if the claimant originally used asbestos in constructing the building, it will not be able to claim LRR when removing it. LRR will not be available to a tenant removing any contamination or dereliction caused by the landlord.
The removal of Japanese knotweed may qualify for 150% relief
Case Study. A developer buys land in a contaminated state in 2014. He remediates the land and sells the completed development a year later.
| Sale proceeds of development | £12,000,000 | |
| Purchase price | £1,000,000 | |
| Qualifying remediation expenditure | £3,000,000 | |
| Other infrastructure costs | £500,000 | |
| Building cost | £5,000,000 | |
| Total development cost | -£9,500,000 | |
| Taxable profit before LRR | £2,500,000 | |
| Additional 50% relief on Qualifying remediation expenditure (£3,000,000 x 50%) |
-£1,500,000 | |
| Taxable profit after land remediation relief | £1,000,000 |
Cash tax saving as a result of LRR available in year of claim: £1,500,000 x 20% tax rate = £300,000