Multiple ownership should not be a barrier to land sales says Saffery Champness
Often land will be identified for development but held under multiple neighbouring ownerships. For example, Farmer X owns area A, Lady Y owns area B and Lord Z owns area C, but a developer wants to develop the whole ABC plot. There are several ways in which such transactions can be structured.
Equalisation agreements are common. Under these, the owners share sale proceeds between them in agreed proportions, regardless of who sells the land.
Hannah Mazrae, Partner, Saffery Champness and a member of the firm’s Land and Rural Practice Group says:
“The agreed proportion is generally based on the split of the market value of the land owned by each party. An equalisation agreement protects each owner’s position and ensures they receive their fair share from the deal. It prevents individual landowners from holding one another to ransom, where, for example, one landowner owns the element prime for high end housing and another owns the element prime for affordable housing, but the development cannot proceed without the whole.”
To mitigate the double taxation that can arise under an equalisation agreement, cross options or cross covenants can be used as an alternative.
With a cross option each landowner grants an option to the other to acquire a share in their land, exercisable when planning permission is granted, but at the market value of the interest at the date of the grant.
The granting of the option is a disposal for CGT, with each party being subject to CGT on the value of the option received. It is therefore essential that the options have a low value. That generally means that the options must be granted when the land still has just agricultural value and before any ‘hope’ value accrues.
The granting of an option to acquire land is considered a grant of an interest in that land, which is a VAT exempt supply, subject to the option to tax. Hannah Mazrae says:
“Whilst there may not be consideration in terms of cash payable with respect to such grants in these circumstances, the various options granted will often create a series of barter transactions and careful VAT planning is required to ensure no one landowner is left disadvantaged from a VAT perspective.”
With a cross covenant, each landowner grants a restrictive covenant to the other landowners which prevents any development without the consent of the holder of the restrictive covenant. The developer needs to pay the holder to release that covenant so that the development can proceed.
Again, the granting of the covenant is a disposal for CGT, with each party being subject to CGT on the value of the covenant received, and so it is essential that the covenants have a low value.
Payments for lifting a restrictive covenant are consideration for the surrender of a right over land and are therefore exempt from VAT, subject to the land being opted by the holder of the covenant. The placing of the restrictive covenant in these circumstances is not a supply for VAT purposes. Hannah Mazrae says:
“Cross options and cross covenants are generally only effective in passing on or sharing future uplift in value. Neither cross options, nor cross covenants, will qualify for Business Asset Disposal Relief (BADR).”
This can be an effective solution as, with a land pooling arrangement, each landowner contributes their land into a bare trust and so effectively exchanges their 100% interest in their own land for a proportionate undivided interest in the whole developable area, with the proportionate interest based on the respective value of the land contributed. Then, when the land is sold, each owner is selling their proportionate share, and the proceeds are split accordingly. With no payments between landowners, there is no double taxation.
There is established case law supporting the position of no charges to CGT or Stamp Duty Land Tax (SDLT) on creation of the bare trust. Expert advice is however required to value the pooled interests and proportionate interests in the pooled land, and care is needed in preparing the documentation. There are, however, downsides to land pooling. Hannah Mazrae says:
“As the landowners will own different interests in land as a result of the pooling, they will lose any inheritance tax (IHT) or CGT reliefs that they may have earned due to the length of time they had held their land, for example Agricultural Property Relief (APR) and BADR. Qualification for BADR could be secured by the landowners farming the pooled land in partnership.
“Also, if the development does not proceed and the land is not sold, the bare trust may have to be unwound, which can be complicated.”
Those contributing land to the bare trust should register for VAT as a partnership to allow VAT to be recovered on costs and to ensure the correct taxable person is bringing VAT on the sale of the land to account. There are complexities that arise when an interest in land is contributed to a bare trust, or indeed a partnership, and the deemed supply rules for VAT purposes may result in VAT needing to be brought to account by the party contributing that interest, subject to their VAT status. Such VAT is recoverable by the ‘partnership’ subject to certain conditions being met and expert advice should be sought.
Further information from:
Hannah MazraeSaffery ChampnessT: 01202 204744E: email@example.com
About Saffery Champness LLP
Saffery Champness LLP is a firm of chartered accountants that advises individuals and families, not-for-profit organisations and businesses across a range of sectors. As a member of Nexia International, it is part of a worldwide network of independent accounting and consulting firms.
For over 160 years, the firm’s success has been founded upon providing clients with a genuinely partner-led service and working with them to create bespoke solutions that help them to achieve their personal and business objectives. For more information visit www.saffery.com or see Twitter @Safferys