Development Land Promotion Agreements: Key Tax Considerations for Landowners

Securing planning permission can significantly increase the value of land. However, the process is often lengthy, costly and uncertain.

Many landowners choose to enter into a promotion agreement with a land promoter. The promoter funds and manages the planning process. If planning permission is obtained, the land is marketed for sale and the promoter is paid out of the sale proceeds.

Promotion agreements can help unlock development value while reducing upfront costs and planning risk. However, there are important commercial, legal and tax issues to consider. Decisions made at the outset can affect both the net proceeds received and the tax treatment of the sale.

Whether you are considering a promotion agreement, comparing it with an option agreement, or exploring your land’s development potential, it is important to understand the key issues from the start.

In this article, we focus on some of the main tax considerations for landowners, including:

Key tax issues

1. Capital or trading treatment

2. Capital gains tax timing and upfront payments and computation

3. VAT – recovery of VAT on costs and the promoter’s fee

4. Multiple landowners and equalisation

5. Reliefs and succession planning

1. Capital or trading treatment

This is often the most important issue. When selling land most will seek to be taxed as a capital gain (current maximum rate of 24%) rather than being subject to income tax (at up to 45%) on some or all of the gain.

Care is needed to avoid inadvertently triggering an income tax charge on some or all of the profit. Key areas to consider include the transactions in land rules, the badges of trade and whether any arrangements could be viewed as giving the landowner a ‘slice of the action’.

2. Capital gains tax timing and upfront payments

Promotion agreements often lead to a sale under a conditional contract once planning permission has been obtained. The timing of the capital disposal can be critical, particularly where:

• Tax rates may change
• The seller is considering rollover relief
• Deferred consideration is involved – which is now commonplace

Tax and cash flow modelling is often important to consider at an early stage to ensure crucial areas are addressed in the agreement. Thoughts should be given to upfront payments, deferred consideration or any overage payable. Will there be enough money to pay the relevant tax bill if the sale proceeds are received over time?

3. VAT – recovery of VAT on costs and the promoter’s fee

VAT is often overlooked but can have a significant impact on the overall economics of a promotion agreement.

Key considerations include whether the land is opted to tax, whether VAT on the promoter’s fee and other costs can be recovered, and the VAT treatment of any premiums, option payments or the eventual land sale.

Where VAT is charged on the sale price, SDLT  will generally also apply to the VAT-inclusive amount. This should be factored into commercial negotiations and deciding whether to opt to tax.

VAT issues can become particularly complex where there are multiple landowners or where substantial development expenditure has already been incurred. Specialist advice at an early stage can avoid unexpected VAT costs, protect VAT recovery and ensure the agreement is structured appropriately.

4. Multiple landowners

Where several landowners are involved, careful structuring is essential.

Issues to consider include equalisation arrangements, the allocation of costs, the sale of land in phases and the risk of inadvertently creating a partnership or joint venture. Getting these matters wrong can lead to unexpected tax consequences and disputes between landowners.

5. Reliefs and succession planning

Where land has development potential, it is important to consider the impact on tax reliefs and succession plans.

This may include the availability of reliefs such as rollover relief and business asset disposal relief, as well as the inheritance tax implications of any increase in development value. These issues are often easier to address before a promotion agreement is signed, providing greater flexibility to achieve your longer-term objectives.

If you are considering a promotion agreement, option agreement or other development land arrangement, early tax advice can help you avoid costly pitfalls and maximise the value ultimately realised from your land. Please get in touch to discuss how we can help.