Land pooling. Development land multiple owners. Development land multiple owners. John Barnett CTA TEP. Land pooling 7 October 2011

Transcription

1 Land pooling John Barnett CTA TEP Development land multiple owners Development land multiple owners 1

2 Equalisation Multiple owners competition for prime uses Equalisation helps promote sustainability But the tax system conspires against equalisation Eight main tax issues Easiest to illustrate with examples Development land multiple owners % split 13% 9% 50% 17% 7%4% 2

3 Equalising payments Agreement between landowners that when one sells, he will pay appropriate % to the other landowners If structured properly may avoid upfront tax problems But significant tax problems on sale. Equalising payments - tax problems Orange land sold for say 1m Cost say 50,000 Gain 950,000 Tax at 28% = 266,000 But must give 93% of proceeds away = 930,000 Net result ( 196,000) Tax problems 1. Equalising payments non-cgt deductible 3

4 Equalising payments - tax problems Further problems for recipients Proceeds 930,000 Cost NIL Gain 930,000 Tax at 28% = 260,400 No entrepreneur s relief Tax problems 1. Equalising payments non-cgt deductible 2. Receipt of equalising payments fully taxable 3. Equality money is not a business-asset Restrictive covenants Each landowner imposes covenant on his own land Covenant restricts use of land only to agricultural use Covenant is in favour of each other landowner When any block is to be developed, the other landowners lift the covenant in return for a payment 4

5 Restrictive covenants - tax problems at outset Current (hope) value say 600k Current value if restricted to agricultural use, say, 100k Value of covenant, say 400k Tax calculation Proceeds 400,000 Less cost negligible Gain 400,000 Tax at 28% 112,000 Tax problems 1. Equalising payments non-cgt deductible 2. Receipt of equalising payments fully taxable 3. Equality money is not a business-asset 4. CGT at outset; dry tax charge Transfer to a company Each landowner transfers the whole of his/her land to a company Either by way of gift Or in return, the company issues shares to the landowners in proportion to their shareholdings 5

6 Setting up a company Newco If whole of business goes into company then s162 incorporation relief Otherwise structure as a gift to get s165 holdover relief (Or possibly just take the 10% hit upfront?) However, Stamp Duty Land Tax difficult to avoid Main problem comes when company sells Setting up a company Corporation tax at 26% on any further gain made by the company Newco Income tax at 36.1% when money distributed by company Effective rate of tax 52.7% Compare to 10-28% rate of tax if sold individually Tax problems 1. Equalising payments non-cgt deductible 2. Receipt of equalising payments fully taxable 3. Equality money is not a business-asset 4. CGT at outset; no cash with which to pay it 5. Likely SDLT on pooling and de-pooling 6

7 Trust structure The essence of a land-pooling trust is very simple Before: each individual owned 100% of small area After: each individual owns X% of whole area Trust structure - before Trust structure after 7

8 Split by acreage or value? Unfortunately split by acreage causes problems What is crucial for tax purposes is that: value in = value out Warrington (Jenkins) v Brown [1989] STC 577 Valuations are crucial % split by acreage % split by value 8

9 % split by value 9% 12% 51% 15% 9%4% Tax treatment of Trust No CGT on creation Correct allocation of CGT on sale However. SDLT on creation Not a business asset Illustrates other tax issues Income or capital Inheritance Tax not a business asset Inheritance Tax how to release cash? Certainty 9

10 Tax problems 1. Equalising payments non-cgt deductible 2. Receipt of equalising payments fully taxable 3. Equality money is not a business-asset 4. CGT at outset; no cash with which to pay it 5. Likely SDLT on pooling and de-pooling 6. Income tax (40%) or CGT (18%) 7. Inheritance tax 8. Certainty Towards a solution Three further ideas Agreement with developer On purchase of any area of land developer must purchase similar area from each other landowner at same price 10

11 Agreement with developers - practical problems Works OK from tax perspective Obvious practical problems with this. Might work where just two or three landowners with similar size parcels of land Partnership or LLP Broadly similar to Trust structure but some potential advantages Tax treatment of Partnership SDLT may be lower if landowners are connected Business asset IHT relief if correctly structured Significant practical difficulties LLP 11

12 Cross-options Each landowner grants every other an option to acquire correct % Exercise price = present market value Not exercisable until planning granted Side agreement to postpone exercise pending deal with developer Cross options Options have minimal upfront value Avoids CGT and SDLT at outset On sale, developer makes direct payments for waiver of option Achieves correct apportionment Greater certainty But option not a business asset nor IHT relieved Conclusion No solution is perfect Balance between competing taxes Often requires a bespoke solution incorporating elements of the above Practical complications of pooled structures are significant Decision-making and professional advisors 12

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