Compulsory purchase orders (CPOs) are an increasingly important topic for landowners and those who receive compensation need to be aware of the potential tax issues they could face.
In this blog, the Clayton & Brewill team discuss key issues associated with CPOs as well as the potential available tax reliefs on compensation payments.
What is a compulsory purchase order?
A CPO is a legal tool used by public authorities to acquire land or property for public interest projects such as building new roads, schools or housing developments. The CPO allows authorities to bypass the landowner’s refusal to sell, but they are entitled to receive compensation for the land and any losses incurred as a result of the acquisition.
The process of getting a CPO involves several different stages, including notifying affected landowners, allowing for objections and challenges and often a public inquiry. The acquiring authority must demonstrate a compelling case in public interest to justifying instating a CPO and landowners can potentially challenge the decision in court if they feel it would negatively affect them.
Capital gains tax and inheritance tax considerations
When land is sold under a CPO, this sale is involuntary and so will be subject to Capital gains Tax (CGT) on any proceeds received from this. Since the Autumn Budget in October 2024, CGT on land and other assets has increased from 18% to 20% for basic rate and 20% to 24% for higher rate – bringing it in line with residential property rates.
Another consideration, particularly for farmers, will be the potential impact on their inheritance tax (IHT). Following announcements from the Autumn Budget 2024, from 6 April 2026, qualifying agricultural land and business assets with a combined value of up to £1 million will continue to benefit from 100% relief and any value above this will be eligible for 50% relief. However, compensation payments will not benefit from relief unless they are reinvested into other qualifying IHT relievable assets.
Eligible relief: CGT Rollover Relief
The tax system does offer some relief to land sold under CPO, or under threat of CPO, in the form of Rollover Relief. Rollover Relief allows CGT to be deferred by reinvesting the proceeds into qualifying assets.
When land is sold under CPO, Rollover Relief rules are different. The key differences are:
- Proceeds must be reinvested into new land – improvements to existing land or buildings will not qualify
- The new assets does not have to be used for business purposes
- The date of disposal is when the amount of compensation is agreed, not when the asset is sold
- A dwelling house can qualify for relief but not if it becomes the main residence in the next six years
- The landowner must not have taken any steps to dispose of the land or made their willingness to sell known to the authority with CPO powers.
Eligible relief: Business Asset Disposal Relief (BADR)
BADR is another relief available, which helps to reduce the rate of CGT applying to gains arising on the disposal of a trading business. For disposals on or before 5 April 2026 the CGT rate applying to disposals qualifying for BADR up to the available lifetime allowance (a max gain of £1 million) is 14%, rising to 18% for disposals on or after 6 April 2026.
However, BADR is only available if the landowner is ceasing to trade at the same time. The relief only applies where there is a disposal of a business or business interest, so just disposing of a business asset, such as the land, will not qualify.
How we can help
While compulsory purchase orders can seem beneficial and initially straightforward, landowners are encouraged to consider the full implications of these payments and how they might affect their future finances.
The friendly team at Clayton & Brewill would be more than happy to provide you with support if you feel you will be affected by a compulsory purchase order. Get in touch with us today to find out more.
