Potential Planning Problem

Potential Planning Problem

RICHARD HOLME and JANET PATERSON of Creaseys Tax Consulting examine the proposed planning gain supplement.

ALTHOUGH IT HAS attracted little attention since the Budget, perhaps one of the most startling announcements on 17 March was the acceptance by Gordon Brown of the recommendations in the Barker Review and, in particular, the proposed planning gain supplement. Over 150 pages, the Barker Review discusses the shortage of supply of housing land and how landowners should be encouraged to bring forward land of this type for development. To prompt this commendable social objective, we have the likelihood of a planning gain supplement applying from late 2005.

Although the proposals are very general at present, it seems that planning gain supplement will be charged on the owner of the land when planning permission is obtained, not when the land is being sold, so that there will, therefore, be money available to pay the supplement. Furthermore, payment by instalments might be allowed to ease the landowner's cash flow. There is also a suggestion that there may be two possible rates, for greenfield and brownfield sites, as well as varying levels of charge for different regions of the United Kingdom so as to provide incentives for development, or otherwise, in those areas.

Opportunities available

The Barker Review suggests that the existing régime for taxing sales of development land is flawed and over-generous in some cases. It suggests that the availability of business asset taper relief, and rollover claims in particular, result in a very small tax yield for the Exchequer. It notes that agricultural land in the south east may be worth as little as £9,122 per hectare in its current use and as much as £2.8 million otherwise. Gordon Brown may see opportunities to raise much needed revenues from the gains inherent in development of such land, as well as bringing forward land for housing.

The review discusses other means of raising tax and releasing land, such as VAT or even a development gains tax. References are made to earlier attempts to tax windfall gains on development, such as the 1967 betterment levy, the 1973 development gains tax, and the 1976 development land tax which lasted until 1984. Although admittedly in a different tax climate, it should be noted that the rates of the development land tax were sometimes as high as 82 per cent. More importantly, it should be noted that previously such measures had arguably reduced the amount of land coming forward for development and had raised much less revenue than expected. Notwithstanding this, the Barker Review states that it is planning complexity rather than taxation which inhibits development.

Lack of detail

The review is light on detail and a number of areas are unclear at present. At the moment, the developer may need to make provision under section 106, Town and Country Planning Act 1990 to provide affordable housing and social amenities, or a cash subsidy as a price for getting planning permission. It suggests that the planning gain supplement will replace substantially such arrangements, although transitional arrangements may be tricky where, for example, an option is to be granted over development land. It is difficult to see how the supplement will replace social housing requirements, although it could fill the role of the planning tariff promulgated a little while ago by the Deputy Prime Minister. We are presently seeing many clients who perhaps are looking to grant options to developers to sell land and seek some assurance that the amount received will be free of tax, or that the post tax yield will be a measurable amount. The wording of such option agreements is not easy at present and this is creating uncertainty in this sector.

Uncertainty also exists as to whether the planning gain supplement will merely affect previously undeveloped, i.e. greenfield, sites and former commercial, i.e. brownfield, sites, or whether it will also bite on, for instance, 'back garden' development. This will be of particular importance to homeowners selling surplus land for development, particularly if planning gain supplement is at a higher rate, because such disposals may currently be exempt from capital gains tax.

Another uncertainty is whether the planning gain supplement will apply to exempt bodies such as pension funds or indeed perhaps to non United Kingdom residents holding United Kingdom land. In both these cases, it seems quite probable that the planning gain supplement will extend, although thankfully it should not apply to development of land outside the United Kingdom, as this is not the intention behind the review. The ability to offset losses or indeed to credit the supplement against direct taxes, such as capital gains tax and corporation tax, is unclear and made more complicated by the different timing of the various charges. It may be that the planning gain supplement will be a stand alone charge, given as an expense in computing a subsequent tax charge with no ability to credit or offset losses.

Potential disincentive

As, logically, a punitive rate of tax payable as a result of the grant of planning permission, not disposal, would discourage rather than encourage the release of more development land, it is to be hoped that the planning gain supplement will be more akin to a tariff replacing section 106 payments rather than a rebirth of development land tax. Certainly, this was the impression given by Kate Barker at a recent House Builders Federation seminar. Whether this is how the Government interprets these recommendations remains to be seen. Were the planning gain supplement to be a statutory tariff for such matters, this would undoubtedly speed up the planning process and provide a greater degree of certainty for both landowner and developer as to the cost of planning permission. However, until some clear guidance is given, uncertainty will continue in the market which may tend to discourage the grant of long term options or conditional contracts.

The examples show some of the difficulties at present while the planning gain supplement régime is unclear.

Richard Holme and Janet Paterson can be contacted on janet.paterson@creaseys.co.uk or 01892 546546. They acknowledge Gilbert Green, e-mail: fggreen@ts-p.co.uk, of solicitors Thomson Snell & Passmore for his assistance on some aspects of the article.

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