Planning gain is currently raised via section 106 agreements/ undertakings in relation to site-specific issues. Following Kate Barker’s review on the planning system1 and her recommendation for the profit of developments to be more equitably shared, HM Treasury consulted upon the key principles of planning gain supplement (PGS) in December 2005. Section 106 obligations will continue for site-specific issues and affordable housing provision, but in a scaled-back way. PGS will be an additional levy, managed by HMRC and the VOA, a proportion of which will be retained by HMRC and a “significant majority of PGS revenues would be hypothecated for local infrastructure”. The exact proportion has not been settled but is currently indicated as at 70%2. In reality, the aggregated effect will probably be a higher overall level of planning gain whether by section 106 obligations or PGS. PGS will not apply to small domestic developments and those within the GDPO 19953.

A further consultation was issued last December in relation to technical practicalities of working the new PGS, and how PGS liability would be assessed and valued. This consultation ends 28 February 20074. PGS will require new primary legislation. Whilst Gordon Brown in his December 2006 pre-budget report stated PGS would not be introduced before 2009, many suspect it will be included in the 2008 Finance Bill.

The key points of PGS are:

  1. The basic calculation of PGS will be made following:

Uplift = planning value – current value

PGS Liability = Uplift x PGS rate

  1. The consultation is silent on what the PGS rate might be although rumoured at 20 – 30%
  2. Current value will be the market value of land and buildings on the development site with allowances made for any existing rights to develop, and deductions for hope value and unremediated contamination.
  3. Planning value will be the market value at the date the full planning permission (or last reserved matters approval on an outline permission) is granted, with allowance made for previous extant planning permissions (whether or not PGS has been paid), and deducting for the cost of planning and highway obligations, land assembly costs (but not purchase costs) and unremediated contamination.
  4. PGS will be by self-assessment at the date full planning permission (or last reserved matters approval) is granted. The self-assessed return (but not the payment) will be made together with an application for a “start notice” by the applicant developer who then becomes liable for payment. However, liability may be transferred to a current then subsequent owner. Once the self-assessment has been checked and accepted by HMRC, they will issue a “PGS start notice” upon which development can begin. Development in advance of the start notice will be unlawful and HMRC will have special powers to stop works on site.
  5. Payment of the PGS must be made within 60 days of the “start notice”. HM Treasury has resisted all attempts to introduce a “pre-commencement agreement” which would enable developers to ascertain PGS prior to committting funds to a scheme.
  6. The whole site is valued, whether or not within the Developer’s ownership. This will not take into account the purchase costs of site assembly or ransom strips
  7. The value is based upon the assumption of freehold interest with vacant possession – whatever the real interests.
  8. PGS will be payable on all permissions – including section 73 variations of conditions, renewals and duplicate applications, and also probably certificates of lawfulness. Important to note:
  • These key points (above) may change before 2009, although the previous consultation did not take many responses on board as amendments, so it seems likely this is the blueprint.
  • Although no transitional provisions have been published, the consultation states that PGS will not apply to applications pending at the time PGS is brought in.
  • Care will need to be taken in assessing what work (for example remediation) will have a positive/negative/neutral effect on value both as current value and as planning value.
  • A strategy will have to be evolved on larger sites to ensure PGS is paid most effectively as the development phases progress. Part-implementation to jump from one permission to another during construction will not be desirable.
  • Current owners may be liable for unpaid PGS where HMRC considers a start notice should have been applied for, for example, where development is unlawful. Certificates of Lawfulness are themselves permissions which will fall within PGS.
  • It will be important to check draft permissions very carefully, as section 73 condition variation permissions will be liable for PGS and so should not be relied upon to correct errors.
  • All options and sale/purchase agreements conditional upon planning will need to define clearly now which party will bear the cost of PGS and section 106 obligations. For some older options, and unimplemented projects, which pre-date any proposals for PGS, the deal may have to be revisited to ascertain which party will bear the additional cost. The presumption is that the developer will apply for the start notice. Thought will have to be given as to who will have the contractual right to apply for start notices, and when. Any underpayment or non-payment may also be recouped from the owner at the time such enforcement action is taken.

New PPS3

Planning Policy Statement 3 Housing has been issued to replace PPG 3 Housing and Circular 6/98 Planning & Affordable Housing. It will take effect from 1 April 2007. PPS3 is very similar to its consultation draft of February 2006, which was at the time criticised for increasing regulation in real terms without putting forward commercial solutions for encouraging housebuilding to achieve the Government’s 200,000 pa new homes target. Indeed, requiring high levels of affordable housing may have the effect of driving down land values – particularly unremediated brownfield – to the point where retention as commercial/industrial is the more attractive option. The key points are:

  1. Same emphasis on 60% development on brownfield, with target of 2008. However, affordable housing in rural areas may impinge on Greenfield.
  2. Projection of housing requirements still quite long-term (15 years) but the emphasis is on Local Development Frameworks (LDF) assessing provision in the first 5-10 years. Windfalls can no longer be included. To obtain permission you will need an allocation. The emphasis is on planning, monitoring and managing housing supply.
  3. There is no longer mention of an on-site parking cap.
  4. The overall national density is 30 units/hectare, but the PPS allows a lower threshold, and encourages a range of densities, all at/below the threshold. In reality, this is likely to have the aggregated effect of lowering the overall density of new developments.
  5. Under PPG3, County Councils had a strategic role in setting housing targets, and the need assessment for affordable housing was made at local level. Under PPS3, the Regional Spatial Strategies will have the key housing role, assessing demand and need and suitable locations (in macro) and overall targets. Local authorities will then interpret this into their LDFs (in micro).
  6. Affordable housing in lieu payments can only now be allowed where “robustly justified”, a more emphatic reiteration of PPG3. Affordable housing is now a clearly defined term, as is “social rented” and “intermediate” housing (the latter being shared equity or RSL-provided low cost), and excluding developer provided low cost housing. Worryingly, PPS indicates developers should consider providing low cost housing alongside market housing (and therefore in addition to any affordable housing requirement).
  7. Mix is important to both PPG3 and PPS3 but the emphasis in PPS3 is on achieving an overall mix of occupancy which may well have the effect of some sites bearing proportionately more affordable housing to make up for a shortfall elsewhere.
  8. The threshold for affordable housing provision used to be 1 hectare (0.5 hectares in London) or more than 25 units (15 units in London). Under PPS3, the threshold is simply more than 15 units. Local authorities are encouraged to consider lower thresholds if “viable and practicable”.
  9. Local authorities must consider the “risks to delivery” of housing including funding and economic viability. This goes further than Circular 6/98.
  10. Previously, local authorities were instructed to be neutral on tenure of affordable housing. In practice they have proved quite demanding, including in relation to the choice of RSL, although that too in policy terms has been strictly outside their brief. Under PPS 3, LDFs are to set targets for different types of affordable housing in their area. Some flexibility will be required though as non-RSL affordable housing providers may now receive public grant under the Housing Act 2004.
  11. The sustainability test in PPS3 emphasises availability of the site (within the next 5 years) and how achievable the housing delivery is, alongside proximity to infrastructure and transport. The change is one of emphasis rather than content. There is new emphasis on achieving a low (ultimately nil) carbon footprint, and quality design.
  12. The recommendation to local authorities to consider recycling redundant employment land as housing in the 2004 Employment Land Reviews Guidance Note is reiterated in PPS3.

Important to note:

  • Any applications which have not been determined by 1 April 2007 will be determined under PPS3 not PPG3/Circular 6/98. The requirements on density and affordable housing may therefore be more stringent.
  • Any permissions not implemented by 1 April 2007, applications for fresh permission or applications for renewal of an old permission will be determined under the new policy.