Many development schemes involve land owned by different adjoining landowners which is to be promoted for planning purposes as a combined site, either by the landowners themselves or through a third-party developer or promoter. Greater profit may be achieved by joining forces to create a larger more valuable scheme. This note considers how these collaborative transactions may be structured to best maximise tax efficiencies whilst being workable and cost effective.
Landowner collaboration arrangements can vary significantly. Different structures have been developed to ensure that multiple sellers are able to act together in the promotion and sale of combined land and these may be affected by planning requirements, the economy, underlying land ownerships and tax efficiency. A common element, however, is that the land is usually not sold in accordance with the actual land ownership but instead sale profits from the combined site are shared based on previously agreed proportions irrespective of the actual land sold. This is often referred to as equalisation.
Combining land for joint promotion and development can be inefficient from a tax perspective. Key tax considerations may include:
There is potential, however, for the ‘tax’ tail to wag the ‘development’ dog. Complicated structures may be disproportionate to the value of the likely gains to be made. We would always recommend that parties speak to a tax adviser at an early stage.
The landowners may agree to jointly apply for planning consent on their combined land. They will usually enter into a collaboration agreement containing provisions requiring them to sell the whole of the land on the open market once planning consent is obtained with a longstop date following which the agreement determines if consent is not obtained. The costs of promoting the land for planning consent and the sale proceeds are shared in fixed proportions. The drafting will need to reflect the type and scale of the development and deal with issues such as servicing of retained land, landowner input and control, sales of part, infrastructure requirements, overage and pre-emptions and inclusion of third-party land. Each landowner should take tax advice as this structure may not be the most tax efficient structure.
Where developers are involved from an early stage, each landowner may enter into separate option agreements with the developer who will promote the combined land for planning consent before exercising the options. The price payable under the options will reflect the equalised payments with the developer’s agreed share of the profit being deducted. The parties enter into a collaboration agreement under which they agree to share in the proceeds in proportion to the value of their land interests. Options tend to be efficient if entered into at a very early stage when the planning is uncertain as the grant of an option may trigger an upfront CGT charge, however, the right to receive a share of the proceeds will possibly have low value at an early stage. Tax advice is essential.
Landowners may enter into promotion agreements with a third-party promoter and separately enter into a collaboration agreement with each other. Please refer to our article on various deal structures that may be used when selling land with development potential for more information. The collaboration agreement will document the rights to receive a share of the proceeds of sale of the others’ land included within the jointly promoted scheme. It will also set out the responsibilities of each party to comply with promotion arrangements and to owe each other a duty of good faith.
This structure is sometimes used to avoid multiple CGT charges and involves each landowner placing restrictive covenants on their land which they will release in return for payment when the land is later sold. The benefit being that such payments can be deducted from taxable gains for CGT purposes. This structure may, however, have a number of tax inefficiencies such as, upfront charges to CGT and loss of reliefs (good tax advice will be needed) and restrictive covenants can be difficult to enforce.
An obvious collaboration arrangement may appear to be the transfer of the land into a jointly owned company (often a special purpose vehicle ‘SPV’), however, this may trigger SDLT and CGT to be payable on the immediate land transfer and there may be additional tax liabilities on any sale or distribution by the company.
Another collaboration structure may involve combining an SPV with an option – the idea being that the land need not be transferred to the SPV but the SPV has an option to call for the land when planning is obtained and a buyer is found. This may, however, involve complicated arrangements which outweigh the potential benefit.
Partnerships can be more tax efficient, however, issues can arise where the partnership is deemed to be ‘trading’ leading to income taxes being payable.
Pooling Trusts can enable landowners to own a proportionate share of the combined site rather than owning a specific parcel of the scheme. The initial valuation advice is important as the value of the land held by individual owners prior to the land being ‘pooled’ is equal to the value of their proportionate share in the whole. If set up correctly, only one disposal should arise for CGT purposes on each sale. With Pooling Trusts, the land is transferred to the trust and usually a separate joint ownership agreement is entered into.
Additional consideration will need to be given if the landowner is holding their land as ‘trading stock’, for example, if the landowner has taken steps to develop the land or acquired the land with an intention to do so.
Ultimately, specialist tax advice should be taken by each of the landowners tailored specifically to the circumstances of the transaction and the chosen structure weighed up against the potential benefits of unlocking the development potential by agreeing a land collaboration arrangement.
Further and more detailed information about other elements of strategic land can be found here.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.