Establishing who owns the land is always one of the first task. Usually, this can quickly be done by obtaining up-to-date copies of the title from the Land Registry, but it is not uncommon to see land held in several titles or not registered at all. In such instances, land should ideally be registered in one title to simplify a sale. If the land is held in trust or is held in the names of the number of beneficiaries establishing a line of instructions and basic information, such as when the land was purchased or first held, will be very important for tax purposes.
Once the ownership structure is clear the landowner then needs to decide which route to development it will take. There are five options:
- Going alone;
- Joint venture;
- Land promotion with a developer;
- Options; or
- Conditional contract.
Landowners are unlikely to adopt this route unless they feel that they have expertise within the family to progress. Even when there is a surveyor within the family handling the negotiations, most families will still feel that they should get in expert planning advice. In the few situations where I have been instructed and the family has taken this option, I have not been convinced that the best deal was obtained overall, although the family did feel that they saved a lot in fees. Sometimes spending on fees can give a much better return, even if this may not be immediately apparent.
A joint venture with a specialist adviser or a developer can be an attractive proposition to a landowner, with the family providing the land and the joint venture partner contributing by giving their expertise in obtaining planning or in carrying out the development.
Joint ventures will take considerably more negotiation, as all the governance issues have to be examined in advance. The parties tax position will also need to be closely scrutinised so that when the development or sale is completed the profits can flow through in the most tax efficient manner. This might mean a simple corporate wrapper or a structure of several levels depending on the requirements of the parties.
Often, the biggest sticking point is control and deadlock - who has the final say? Many landowners ultimately shy away from a joint venture because they cannot contemplate sharing or giving up some element of control, and developers will often not want to be policed by a partner that, in their view, knows very little about development.
Land promotion agreements are seen as a good half way house between a joint venture and an option and are currently very much in favour. In short, a promotion agreement will see the developer apply for planning permission and market the sale of the land once planning is granted, with the landowner usually only be obliged to sell the land once permission is granted. The developer, if successful in gaining planning permission, will typically receive a percentage of the enhance value.
Landowners should remember that even in this situation the developer will still need to be policed, and should not enter into a land promotion agreement in the developer's standard form, even if this might appear to be the cheaper route, as it is likely to be drafted in their favour.
Option agreements allow a landowner to take advantage of future land values whilst passing some of the risk onto the developer.
I have acted for both developers and landowners, including drafting for one developer a one page option which they would present to landowners at their property and convince them to sign on the spot. Until I saw this in action, I never believed anyone would sign an option selling their land without taking advice, but when great sums of money are discussed it is all too easy for landowners to get carried along by a developer’s promises.
A landowner should never accept an option in the developer's standard form as they will, understandably, be favoured towards the developer. Always seek specialist advice from an expert practitioner that understands this field, creating your own documentation. Usually, the biggest area of dispute or negotiation is likely to be how the price is to be determined or agreed once planning is obtained.
Conditional contracts tend to be favoured when there is a lot of competition for a site, when sites are limited and when market conditions are stable. They offer a developer a secure way to acquire a site and a guaranteed sale for a landowner.
However, the work has to be front loaded, the price or a mechanism to agree the price has to be agreed, and the developer will be required to fund at least a 5% deposit. Personally, I have not seen that many conditional contracts in the last two years, but they can be attractive for landowners, principally that if planning and other conditions are achieved, a sale is guaranteed at an agreed or index linked price. This can attractive as the land may be tied up for many years whilst planning consent is obtained.
Tying up land for many years is not something a landowner should do lightly; the market can change dramatically from year to year. Before entering into discussions, a landowner should establish what their bottom line requirements are, and important considerations for the longer term – particularly if at the end of the cycle the landowner will retain land alongside or near the development site.
Also, set out early the circumstances that will trigger the termination of the transaction should matters not proceed in a way you would like.
Do not be blinded by offers of early cash; in most cases, the landowner will end up paying back or giving credit for any early cash received. And finally, there is also no substitute for good specialist advice. Any investment in time and money at the beginning of the process will be repaid at the other end, even though it may take some time before this is apparent.
Tax should be considered at an early stage in any discussions, particularly as low value grazing or scrub land will generally soar in value once residential planning consents are granted.
Provided an individual seller holds the land as an investment then they will generally be faced with a Capital Gains Tax (CGT) bill rather than an Income Tax bill. The current rate of CGT is 20% for higher rate tax payers. This rate would be applied to the increase in value between the acquisition of the land and the sale, less certain allowable costs such as Estate Agent's fees and Stamp Duty Land Tax paid.
Where the land sold was used for business purposes at the time of sale, including for farming, and the sale is part of the individual's withdrawal from their business it may be possible to claim Entrepreneur's Relief (ER). This reduces the CGT rate down to 10% for the first £10m of gains, provided the full life time limit is available.
Non-UK resident sellers have traditionally not had to worry about tax on disposals of UK land. However, they now need to watch out for new rules which seek to tax gains accruing to UK property which previously escaped the UK tax net. Different rules apply if the land includes a dwelling already or if the land could be said to be for the benefit of an existing dwelling.
Finally, owners of agricultural land have traditionally enjoyed Agricultural Property Relief from Inheritance Tax meaning that the value of the qualifying land was not included in the owner's estate on death. Once such land is sold, however, then the cash proceeds will not benefit from the relief unless they are reinvested into qualifying property. This should be borne mind where the land is agricultural in nature.