It is often the case that housebuilders want to acquire a large development site in order to benefit from the economies of scale. Large sites are rarely held by a single entity, and most comprise a number of neighbouring parcels of land owned by a different landowner. Many landowners will hold their parcels as capital assets.
If these parcels were acquired by the developer at the same time, each landowner would be subject to Capital Gains Tax (CGT) by reference to the price paid by the developer, less the allowable expenditure under section 38 Taxation of Chargeable Gains Act 1992 (TCGA). If the landowner had opted to tax its parcel, the sale would have been standard rated. The developer would have paid the VAT, and the landowner would have accounted for the output tax in accordance with the relevant time of supply rules. No surprises there.
Phased development and equalisation
If, however, the development was carried out in phases, the developer would draw down only the parcel relevant for a particular phase and the price paid to the relevant landowner. It is, therefore, usual to see that the landowners enter into a collaboration agreement under which (a) each landowner would be entitled to a share of the purchase price paid by the developer and (b) the selling landowner would share the proceeds of sale with the other landowners in accordance with the percentage interest each landowner had of the entire site.
This sort of equalisation structure makes sense commercially but is not efficient from a CGT perspective because:
- The selling landowner is subject to CGT on the entire proceeds of sale for the parcel, because the proceeds of sale shared with the other landowners is not allowable expenditure under section 38 TCGA. Burca v Parkinson is usually cited as the authority that these transfers of proceeds of sale are not deductible; and
- The non-selling landowners receiving a share of the proceeds of sale have no base cost in their share of the proceeds of sale from that parcel and so are subject to CGT on the entirety of what they receive. This point was not considered in Burca v Parkinson, and it is possible that these landowners – who could be treated as disposing of their rights under the collaboration agreement (a Marren v Ingles asset) – do have a base cost in that asset by virtue of the fact that they have agreed to share part of the proceeds of sale from their own parcels. Yet, there is no judicial authority directly on the point, and therefore considerable uncertainty/ risk for these landowners.
It is this double tax risk that forces landowners to seek alternative structures such as cross option structures, partnership or land pooling arrangements.
Cross options and LPTs
Cross-option structures are relatively rare because, to avoid a material CGT charge on the option grant, the land must be of low value. Cross options should be granted before planning permission is obtained, and therefore, must be planned well in advance of the sale.
In our experience, it is more usual to see Land Pooling Trusts (LPTs) used, since these can be put in place just before the developer buys the first parcel. LPTs are bare trusts in which each landowner contributes its parcel to the trust, and as a result, holds an equitable interest in the whole site.
The contribution of each parcel to the LPT should not be treated as a disposal for CGT purposes – the authority being Jenkins v Brown. It is also understood that SDLT is not chargeable on these contributions, but HMRC have not, as far as we are aware, ever publicly said they agree that the contribution of land to an LPT is SDLT-neutral.
On a sale, each of the landowners, as beneficiaries of the bare trust are subject to CGT on their equitable share of the proceeds of sale – section 60 TCGA. The intention is that there is a single incidence of CGT, so the double CGT hit is averted.
VAT considerations
As far as we are aware, there is no judicial authority that deals directly with the VAT treatment of LPTs. We know of one now, KC’s opinion, that described the legal basis of the VAT treatment of LPTs as a “bit of a mess”. The view normally taken, however, is that the contribution of land to the trust is a barter, with the landowner swapping its interest in its parcel, for interest in the whole site. On the basis that both the trustees and landowners have opted to tax, and the value given and received are equal, the outputs and inputs mean that the landowners make no payment to, or any claim from, HMRC. Likewise, the trustees. HMRC seem to accept this analysis.
This barter treatment should not be taken for granted, however. We know of one instance where the Isle of Man Customs and Excise viewed the contribution as a linear transaction, whereby the landowner made a supply to the LPT, but the LPT made no supply to the landowner, and insisted on VAT output tax being accounted for by the contributing landowner.
There is still plenty to consider in the context of the CGT and VAT treatment of multi-phase, multi-landowner property development (and we haven’t got on to consider the impact of LPTs on the landowner’s chance of claiming roll-over relief, or on inheritance tax).
First published in Taxation.