Many farmers own land which is ripe for development. This may be owned personally, jointly with family, in their business or in a trust. Often a successful development would only be feasible if the farmer works with his neighbours to secure planning over a larger site. There are various different options for collaboration:
This route requires all of the landowners to transfer an interest in their land to the other landowners so they can all share in the disposal proceeds arising from the sale of each parcel of land. However, this structure is not without tax and legal issues. There is a potential for a “dry tax charge” (a tax charge where there are no “proceeds” of sale to meet the liability) as capital gains tax (CGT) maybe due when the pooling takes place. In addition, HMRC are currently reviewing the stamp duty land tax (SDLT) position, so although they currently accept that SDLT is not due on pooling this position may change. Finally, if planning permission is never granted then it can be messy to extract the land from the pool.
Under this type of arrangement there are no transfers of land at the outset and so no CGT or SDLT charges. Instead the landowners enter into an agreement which documents how the eventual sale proceeds will be shared as well as binding them to act together for the benefit of the site as a whole. Without careful tax planning a double tax charge can arise on the equalisation payments between landowners. In addition, VAT advice should be sought to confirm whether a “consortium” registration would be of benefit, to allow the recovery of any costs associated promoting the land.
Once the landowners are bound together then they will enter into further agreements with the aim of obtaining planning permission and realising a sale of the land.
These types of arrangements are very common for development deals. A promoter will seek the planning permission for the site and then locate a buyer. The promoter usually takes a fee for this service, which will be based on a percentage of the eventual sale proceeds for the site. There are no tax implications of entering this type of arrangement, other than considering whether the VAT on the promoter’s fee will be recoverable.
Instead of a promotion agreement, some landowners will enter into a conditional contract with a developer, whereby the developer will seek planning permission on the site and then buy the site with planning. The net proceeds to the landowner will usually be after the deduction of all of the costs associated with obtaining planning permission.
Option agreements give the developer a right to acquire the site (or a portion of it) once planning permission has been secured. This does not usually give the landowner the right to force the developer to buy the land.
The above refer to situations where the landowners are not intending to be involved in the development process after the planning permission is obtained. However, if they do become involved then a joint venture structure, such as a special purpose vehicle – company or sometimes a Limited Liability Partnership – may be used and the tax considerations will be different.