Capital Taxation of CPO Compensation and the Need for CPO Rollover Relief
A. Fundamental Injustice and Breach of the Principle of Equivalence
There is a serious injustice in relation to Capital Taxation of CPO compensation money which in many cases cannot be avoided due to the lack of CPO rollover relief. The core principal of compulsory purchase is the principal of equivalence. In Horne v Sunderland Corporation (1941) Scott L.J. stated in relation to the Land Clauses Consolidation Act of 1845:
“what is gives to the owner compelled to sell is compensation – the right to be put, so far as money can do it, in the same position as if his land had not been taken from him. In other words, he gains the right to receive a money payment not less than the loss imposed on him in the public interest, but on the other hand no greater.”
If an owner losses land under compulsory purchase and receives compensation equal to the loss from which Capital Gains Tax must be paid, then clearly this is not equivalence and equivalence is breached. If the compensation could be reinvested and the Capital Gains Tax eliminated by means of CPO Roll Over Relief, the problem would be in large measure resolved.
B. The Situation Prior to 2002 – CPO Roll Over Relief
Up until 2002 a landowner receiving compensation for a compulsory purchase had the right to repurchase lands with the proceeds and avail of CPO rollover relief. This meant that after the replacement lands had been acquired the owner would effectively have reverted to the pre-CPO situation in that the monies would again be invested in farmland. By doing this the tax could have been avoided completely or alternatively the tax could have been paid but refunded by the Revenue when the acquisition of the replacement land was concluded. Prior to the 2002 budget other trading assets qualified as assets for CPO Roll Over Relief.
The main points in relation to the CPO rollover relief that pertained in 2002 were as follows:
An actual CPO was not required for the relief to apply. It was sufficient that the disposal was made to an authority with compulsory purchasing powers and that the disposal was for road widening and road building purposes. There was no particular reason at the time why CPO rollover relief was confined to road widening and road building purposes as landowners affected by other compulsory acquisitions were going to be impacted exactly the same and it didn’t matter to the landowner what the acquisition was for, as the consequences were the same. The relief should have applied to all CPO’s so that every landowner was treated equally.
The relief, which went back to the 1995 budget, applied where the proceeds of the disposal were reinvested in certain other assets.
To be eligible for the relief in 2002, the proceeds of the disposal had to be reinvested in assets for the purposes of any trade but not necessarily farming assets.
Effectively, the transaction was treated for Capital Gains Tax purposes as if there was no disposal of the old assets and no acquisition of the new assets. The new replacement assets were treated as if they were in fact the old assets with the same acquisition date, same cost and same market value as the old assets.
In the 2002 Finance Act, the time frame within which the proceeds of a CPO on land could be invested so as to avail of the rollover relief was extended to 2 years before and 8 years after the disposal of the land from 1 year before and 3 years after disposal. This wide time frame took account of the fact that very little land comes to the market each year and opportunities to purchase replacement land are rare.
C.Reasons why CPO Relief should be restored
The following points are relevant to the restoration of CPO rollover relief:
Injustice; It is a serious injustice to acquire compulsorily an asset and then apply Capital Gains Tax to the proceeds and leave the landowner in a position where he or she has a significantly reduced sum to reacquire a replacement similar asset.
Capital Gains Tax was only introduced in the early 1970s in the U.K. and in 1975 in Ireland so before this time Capital Gains Tax was not a problem. The CPO law and practice did not therefore have to address this issue. The introduction of Capital Gains Tax occurred after the main CPO compensation provisions of the Acquisition of Land (Assessment of Compensation) Act, 1919 were put in place. The 1919 Act evolved out of the findings of the Scott Committee which reviewed the basis on which CPO compensation should be arrived at. The 1919 Act is at the core of our CPO compensation provisions but it was enacted as a balance between the common good and compensation at a time when Capital Gains Tax did not exist.
Current government strategy is to promote the agricultural sector. A farm can be quite seriously impacted by a compulsory acquisition and in order to return it to a viable state then the only logical thing that the landowner can do is to acquire replacement lands. However if Capital Gains Tax has to be paid out of the proceeds of the compensation then the money available to purchase replacement land will be drastically reduced.
A taxation concession has already been made in relation to farm consolidation and Capital Gains Tax and the reintroduction of CPO rollover relief would only be a further extension of this same principle.
At the time that CPO rollover relief was removed in 2002 the rate of Capital Gains Tax was 20%. Currently, the rate of Capital Gains Tax is 33% so therefore the loss of compensation to Capital Gains Tax would be significantly higher than in 2002.
The commission on taxation has already reported that CPO rollover relief for farmers should be restored.
CPO rollover relief should apply to any acquisition of land under threat of a CPO even where a CPO has not been exercised. Roll over relief should also apply to all CPO’s regardless of the purpose of the acquisition. If the lands are acquired under threat of a CPO then that should be sufficient for roll over relief to apply. This is a very important point in that some large infrastructure sites for non-road schemes are acquired under threat of CPO.
The number of landowners around the country currently affected by CPOs is now hugely reduced. Nevertheless an individual landowner who loses a substantial portion of land to a CPO, and then has to pay a relatively high rate of Capital Gains Tax out of the compensation, is in a seriously disadvantaged position when attempting to acquire replacement land. There is a clear and obvious injustice involved in the lack of CPO rollover relief which can be readily resolved by the restoration of this CPO rollover relief. The cost to the exchequer will be relatively small and the relief will be of particular benefit to younger progressive farmers at a time when it is government policy to promote the agriculture sector.