Selling or developing land to pay for other ventures can be an appealing prospect for some landowners, but there are plenty of pitfalls to be aware of before embarking down this road.
Three professional advisers offered their advice on the practical, legal and tax implications of land development.
The first step to take when considering planning and development is to garner a good understanding of what lies ahead, said Nicholas White, partner at Carter Jonas.
“It is essential to understand the initial value of the land and to look at what its potential worth could be,” he advised. It is also important to know the planning context for the area as well as the tax implications of development, he added.
Mr White suggested obtaining a copy of the deeds to check for any issues, restrictions or covenants which might cause legal complications could be a positive step.
“Also look at the physical constraints of the land such as access, flooding, conservation areas, or if a third party needs to be involved,” he said.
Evaluating the costs was also key, who will cover them and whether it will be the landowner, the promoter or developer.
“The next step is to decide whether to operate under self-promotion or through development partners,” said Mr White. “Even a simple planning application can cost from £20,000-£50,000, and large development schemes can attract promotion costs of £200,000 or more, so the stakes and costs are very high.”
The main options for a landowner who decides not to seek planning permission themselves is an option or a promotion agreement. In the case of an option the eventual sale price is negotiated in advance, whereas with a promotion agreement it is determined by offering the land for sale on the open market.
There can be significant financial benefits in choosing the promotion route as the interests of the landowner and promoter are aligned.
However, anyone thinking of securing planning permission should seek offers from both developers and promoters.
Joel Woolf, partner at Foot Anstey, said it was always worth planning ahead.
“Look at what problems can arise, what impact they can have and what you can do about them.”
Splitting business issues from personal issues is a good starting point, as well as budgeting for cashflow and tax as the business needs to be viable.
The key issues which could affect the development were death, divorce, debt, disaster and disability, said Mr Woolf. Planning ahead for any of these could avoid situations which could drag on for years and potentially cause problems for any development.
There are several solutions to address these issues before they become a problem, such as properly constituting the business with a partnership agreement which is mirrored in the Wills. There needs to be an agreed succession plan and a members’ agreement if operating under a Limited Liability Partnership or a Limited company. Lasting powers of attorney should be established and a family constitution could be a good way of dealing with issues before they come up.
Pre and post-nuptial agreements would not stop a partner from getting what they were entitled to, but assets could be ring fenced, added Mr Woolf. Making such agreements compulsory as part of the partnership agreement could avoid any awkwardness.
“Planning properly can secure business and personal wealth as well as family relations," he said.
Tax is one of the biggest pitfalls landowners need to be aware of when looking into developing land.
Capital Gains Tax (CGT) is typically levied at 28 per cent on the uplift in land value, but Entrepreneurs Relief (ER) can be used to lower that to 10 per cent.
Sam Kirkham, partner at Albert Goodman accountants, suggested applying for ER could be an effective way of minimising tax losses. However, to qualify for ER there had to be a disposal or part disposal of the business, with a part disposal being particularly difficult to achieve.
“HMRC is policing the relief and an application for ER will mean an inquiry by HMRC,” said Ms Kirkham.
It was important to ensure the business ceased in time with the sale, so the two were linked, to qualify for ER.
The landowner also needed to be able to provide ample evidence they have been in charge of the business for at least a year before the cessation of trading, and should keep records of that evidence as they went along.
When dealing with large developments where the land is under multiple ownership and the landowners would share the total proceeds, it was unlikely there would be a perfect solution.
“There are numerous tax issues but it can be possible to find a balance between tax and commercial considerations,” added Ms Kirkham.