Implications of a Proposed New Property Tax

24 April 2007

The government has invested time and resources in what in effect is a new property tax which is likely to be introduced in 2009.

At the moment the only thing that is certain is that nothing is certain! All we can do is to say what looks probable now.
Since the tax was discussed several months ago projections have changed. They may well change again before 2009.

What is it and how does it work?

Planning Gain Supplement (PGS) is likely to be payable in the case of all grants of planning permissions - except for the most minor such as the extension of an existing house. The tax itself will be a percentage of the capital value uplift created by the new planning permission. This is calculated in such a way that at times it will be higher than the actual sale price of the land on the open market.

The percentage charge is what the Government calls a ‘modest’ level. A rate of 20 per cent is currently being talked about. It will be payable by the person carrying out the permitted development within 60 days of that development’s start date. So say, for example, that Mr A owns land at the time planning permission is granted and then sells it to Mr B who carriesout the development, it is Mr B who pays the tax.

Replacement of planning agreement payments?

Under existing planning procedures, a landowner/developer may be required to enter into a planning agreement with the local authority. That agreement may provide for practical matters in relation to the development site – but it can also provide for payment to the local authority of a cash sum that could (in the case of a very large development) be used to pay for a new school or a similar major community project. In the case of a more modest development, it could go towards landscaping, traffic lights or other items. However, many or most ‘ordinary’ planning permissions don’t involve any payment under a planning agreement.

It may be that PGS – which will go first to central government – will not be earmarked for any particular local community project, whether or not one is required by the actual development. And talk of PGS wholly replacing planning agreements may well be wide of the mark.

The tax will probably be collected on a self-assessment basis - but with the district valuer involved in subsequent
checking of values with a possibility that the tax bill could go up (or down) and interest payable on any balance of tax not originally paid.

Effects

• Planning permission for a major residential development on a green field site is likely to create a taxable increase in value of hundreds of thousands of pounds per acre. Permission to convert a redundant barn into a non-agricultural office or workshop would produce a much more modest tax gain. Previously, the former would have been likely to involve a planning agreement payment whereas the latter probably would not. After 2009 both are likely to suffer the tax.
• If a landowner gets planning permission and then carries out his own development (either for his own use or for letting) he will have to pay tax on the increase in capital values – even though he will not be getting any capital return.
• If a landowner or developer carries out a development with a view to selling the relevant unit/s he will have to pay the tax within 60 days of the development start date - even though that might be months before the capital value is realised through the sale.

These three examples show how the tax may be (painfully) experienced. In relation to development options, it’s worth being aware that if the developer, or any third party, obtains planning permission in respect of the landowner’s land but then doesn’t buy it, he will be leaving the landowner with something of a tax time bomb – potentially triggered by the landowner or someone else later starting the permitted development.

As far as the landowner looking to sell land to realise cash or investment in his business is concerned, the existence of the tax may significantly reduce the sale price to a developer buying the land (including on an option or conditional contract basis).

Conclusion

Despite some educated guesses about how PGS will apply, nothing has been settled. My advice is this:

1. Where any development is now anticipated, PGS can be avoided by obtaining planning permission before the tax is introduced in 2009.
2. Current negotiations for development options, conditional contracts and the like which have a life running through and beyond 2009 must take account of the impact of the tax on a price-fixing formula set out in a pre-tax contract.
   The interests of landowners and developers will obviously differ.

For more information contact Christopher Wacher

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