On Thursday 29 April our webinar series property owners post-COVID focused on residential development.
Our panel comprised Alexander Dickinson, Partner, Womble Bond Dickinson as chair, Robert Drewett, Senior Counsel, Womble Bond Dickinson, Charlotte Pink, Principal, John Alison Land & Research, Nicholas Smail, Partner, Hazlewoods and Lucy Lockhart, Land and Planning Director for the Bristol Region, Taylor Wimpey UK Limited.
The discussion focussed on land owners seeking to convert land to residential use and the hurdles to overcome. The key points are summarised below, to watch the full webinar please email: firstname.lastname@example.org.
Identifying potential land and first steps
- Physical aspects of the land – location, nearby settlements and local district council. Charlotte demonstrated a software platform called Landstack which she uses to cover site analysis including the surrounding green belt, flood plains and other issues.
- Deed and titles – early due diligence in understanding who owns the land seems basic in principle, however is something that can cause problems when deeds are not up to date. Understanding the title of the land can help determine any restrictive covenants which are better known at an early stage and other impediments on the title.
- Tax planning – it is beneficial for the owner to begin tax planning as soon as possible and well before planning is granted, as tax costs can be better managed the earlier that accountants, such as Hazlewoods, are brought into the discussion. As well as capital gains tax, ownership of the land and inheritance tax need to be considered at the outset.
- Appealing to developers – Key considerations include location, facilities that are currently in situ or whether these will be developed, employment opportunities around the area, schooling and transport links and the amount of competing sites.
Promoting land for development
The options discussed during this session focused on working with a third party to mitigate the risk associated with the land owner promoting the land themselves. The trade-off is that a discount or fee will be due to the third party that secures the consent.
When working with a developer there are two main alternatives, each with advantages and challenges:
- Option over land – a developer obtains the planning permission required to build on the land and then has the option to buy at a pre-designated discount to market value. The pros are that this can appeal to a local council as they see guaranteed deliverability. Disadvantages include once consent is obtained the developer interests may fall out of alignment with the landowner.
- Promotion agreement model – this model still sees a developer involved in securing the planning permission, but once obtained the land is offered in the open market. The advantages of this method include that interests remain aligned between developer and land owner, and the parties can be satisfied that true market value has been obtained. However, the promotion fee will attract VAT. Speak to your accountant on this as there is a mechanism to allow the VAT to be recovered.
Opportunities for adjacent land
From a developer's perspective it can be more appealing if adjoining areas have additional facilities such as leisure, retail or schools and avoid noise pollution, or uses which cause an odour. Ensure rights are clearly drafted in the contracts for access to boundaries and opportunities available to you. Within the contracts flexibility is important at this stage as it provides you with more options in the future.
The key take away is to be honest and understand your plans for the adjacent land should you be selling only a portion and having these early discussions with the promoter, buyer and your lawyer. Creating a transparent and collaborative process.
After receiving planning permission
Tax implications –When selling the land the tax point is at exchange of contracts, unless it is a conditional contract based on, say, grant of planning permission. Ensure cash is available to fund the tax liability, particularly where there are deferred payment terms. A developer can assist with ensuring sufficient funds are available where they defer some of the payment beyond completion. The capital gains tax liability should be estimated from an early point in order to consider opportunities to mitigate. If the land owner qualifies for Business Asset Disposal Relief (formally Entrepreneurs’ Relief), they could get 10% tax rate. Capital gains tax generally applies but you could get caught by transaction in land rules in which case income tax at up to 45%, could apply. Care is also needed, to avoid double tax, if there are multiple land owners and an equalisation agreement is required.
If operating under the promotion agreement model, the traditional form of sale is by private treaty which will obtain best and final bids from buyers to allow a decision to be made. Owners could also consider a more formal tender process with proposed bids or the land could be taken to auction. To assist with any of these it is important to provide a detailed pack of information on the land, with ecology and other reports which have been created, searches, replies to enquiries and any information which may assist a buyer to reach a conclusion on the land.
- Landowners should have the right team on board, who will be collaborating throughout the process.
- Bring the right team on board as early as possible, to provide their areas of expertise early on to assist you throughout the selling journey.
- Be pragmatic about what is realistic from the site, set appropriate goals and opportunities.
- Produce a detailed and robust pack of information for developers, utilise all information you have gathered throughout the process. You will then receive better and more appropriate bids.