While COVID-19 has changed much of the world that we know, some issues remain the same. There is little shift, for example, in the shortage of housing stock in the UK, particularly in England. Research from the National Housing Federation (NHF)1 and Heriot Watt University suggests that 340,000 new homes are needed for England alone every year until 2031. In 2018/19, the housing stock in England increased by 241,000, some way short of the target. 2020 will see a fall in house completions.
More houses clearly need to be built. In order to build houses, you need land (landowners), someone to build the houses (developers), and, usually someone to bring both parties together (promotors). These parties need to come together and collaborate to achieve the goal.
When a developer or promoter is looking to create and develop a housing project, the first hurdle is finding appropriate land. It is rare that only one landowner is involved, so a framework is required to bring together a disparate number of landowners to achieve a viable project. The framework will seek to apportion revenues and costs in a fair and equitable manner. The objective is to maximise the value of the project.
Problems arise because of practical issues. Some land is unsuitable for development. Land may be close to adjoining roads or infrastructure and will be developed first, while the remaining land is further away and may be the last to be developed, yet the development relies on all parcels of land. Thus, a collaboration agreement seeks to balance these issues.
There are two main types:
This is the better-known land pooling arrangement. Landowners agree to group their land, with values usually agreed on a gross value per acre. When some land is sold, the proceeds are apportioned across all landowners. They will pay capital gains tax (CGT) on their proportion of the gain arising.
The problem comes when one particular landowner’s land is sold. That landowner will look to tax only their share of proceeds by deducting the payments made to other landowners under the agreement. No deduction is available however, despite the fact that the other landowners will be taxed on their share of proceeds. The same problem will arise when the other landowners come to sell their land, with CGT being charged on the gross proceeds, not their personal share of the proceeds. They have already received money, and paid tax, on land that is not theirs, so end up with a double charge to CGT.
Land pooling trusts
An effective solution to the double tax charge is the Land Pool Trust. Under this mechanism, owners transfer their landholdings into a common trust in which they each become trustees. The entire site is then owned by the trust and respective landowners have shares in the trust ownership in proportion to their original acreage or value. When any part, or the entirety of, the trust’s land is sold, trustees receive their due share of proceeds.
In most circumstances, it is better for landowners to put their land into the trust in proportion to value rather than land area. This is because landowners sometimes want to hedge their bets by pooling as much land as possible, irrespective of the likelihood of obtaining planning consent. In reality, areas of woodland, ponds, nature reserves and so on are never likely to be developed, so it would be unfair on other landowners to have these unproductive areas skewing the profit share. Valuation issues arise on areas such as infrastructure, amenity and SANG (suitable alternative natural green space) land. These areas are not valuable in themselves, but are required for planning consent in the first place.
Many Land Pool Trusts appear to work well and the Government appears to have latched on to the merits of this approach. The 2018 Housing White Paper raised the prospect that local authorities and other public bodies could place their own land into land pools to stimulate releases by other owners. The Government ignored some excellent examples at home and instead drew on a case study from Germany. The German example involved 80 different landowners. Perhaps the point was that if it can work with 80 owners, consider how easy it could be with, say, only four.
Care still needs to be taken with land pooling trusts. Stamp duty land tax and CGT can both arise on the creation of the trust at the outset. Landowners whose land qualifies for either Business Asset Disposal Relief (giving a 10% CGT rate) or Agricultural or Business Property Relief (providing an exemption from inheritance tax) will be concerned about giving up their land for a share in other land that does not enjoy the same benefits. If this is the case, cross options may be considered.
This approach sees each landowner granting other landowners an option to acquire an interest in their land. The proportion of land over which options are granted will reflect the relative interests that each landowner has in the combined site. Put simply, if four landowners agree to split total proceeds equally, each landowner will grant options to the other parties representing 75% of his land.
As CGT will be charged on the grant of options over land, as it is effectively the sale of a land interest, values should be kept low, so options should be granted as early in the process as possible before the land increases in value.
When looking to sell land as part of a collective arrangement, there is no one perfect solution. Landowners with advantaged tax treatment on their land, for example, where it is being farmed will seek to lock in these reliefs; this may not work for other landowners. In the end, some compromises are inevitable but the outcome for all will invariably be improved with some tax planning around the development structure when compared to an off-the-shelf equalisation agreement.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.