Charities whether corporate or unincorporated are generally exempt from income and capital gains taxes on property
If a charity were generally to carry out a trade from their property, which was not effecting a primary purpose of the charity (as might be the case for example with a regeneration charity), then it would liable to tax under section 2 of the the Corporation Tax Act 2009 and thereby subject to taxation in appropriate circumstances. In any event, most charities in those circumstances would be acting outside its charitable objectives. [Constitutional and organisational requirements]
Primary purpose trading refers to trading solely as part of or ancillary to a charity’s objectives, or trading carried out by the charity’s beneficiaries. If trading is to an extent carried out on a non-charitable basis e.g. a café open to the general public as well as museum visitors, or a shop selling promotional goods as well as what are more or less educational goods, then a tax charge will potentially arise with respect to that commercial aspect.
There is an exemption if the commercial element over the whole charity’s trade does not exceed the less of 10% of total turnover of £50,000.
The sale of donated goods in charity shops is regarded as primary purpose trading but other sales are regarded as trading.
If it is likely that a charity’s activities will breach the turnover threshold, the charity may consider carrying out taxable activities through a trading subsidiary, whose profits may then be paid over to the charity with the benefit of tax relief. Lettings of charity property to subsidiaries may require Charity Commission consent because the trading subsidiary is likely to be a connected person. [Charities Act when valuation procedures apply]
Sections 819 to 820 of the Corporation Tax Act 2010 contain some significant tax traps for charities selling land. This is important with respect to land acquisitions as well as disposals because it influences how a charity should treat newly acquired land, and land ripe for development.
If land from which any property derives its value from is acquired with the sole or main object of realising a gain from disposing of all or part of the land, or the land is held as trading stock, then subsequent disposal of the land will be subject to a tax charge.
The other provision under those sections is that if land is developed with the sole or main object of realising a gain from disposing of all or part of the land upon development, then a tax charge will arise. Note that prospects for development are one of the things that a surveyor must advise a charity on under section 119 of the Charities Act 2011, and many surveyors are unaware of this potential tax trap. [Charities Act general valuation procedure]