Preparing your land for sale or development: Part 1: Tax, Trust and Succession Considerations

Written by Charlotte Coombs and Julie Sharpe.

This is one of a series of articles. Further and more detailed information about other elements of strategic land can be found here.

In order to maximise the chances of a successful planning application and subsequent sale, it is important for landowners to consider the best structure for owning the land and plan for the succession of their estate to minimise tax liabilities ahead of making the planning application. Obtaining tax and succession planning advice in good time is essential as it is easy to miss out on tax reliefs if tax and succession planning are not considered at a very early stage.

Ownership and Occupation 

The sooner title and legal ownership is reviewed the better. It is important to identify the underlying beneficial interests in the land so the beneficiaries can obtain advice and structure their ownership to manage the tax implications. Where trusts, partnerships and companies are involved, there can often be misconceptions about who owns what and in what capacity. It is often the case that the legal documentation does not match the purported position.

A developer will require the land to be sold with vacant possession once planning is secured. Therefore, in addition to ownership, occupation of the land must be reviewed to ensure any tenancies or licences can be brought to an end and the land vacated when required. If the land is not occupied, consider whether it would be beneficial from a husbandry and tax perspective to be temporarily occupied (see tax considerations below).

Taxation 

The value of the land for Inheritance Tax (IHT) and Capital Gains Tax (CGT) purposes will usually increase on the granting of planning permission. It is therefore important to consider taking legal and tax advice early as this provides more options for mitigating any tax due at a later date; this may not be possible if left too late.  

On the disposal of the land, CGT will generally be payable at a rate of 20% on the value of all net gains in land value. It is possible to reduce the CGT due by taking advantage of Business Asset Disposal Relief (formally Entrepreneurs' Relief) or deferring the CGT using Roll Over Relief, but using these reliefs requires planning and should be considered alongside long-term aims.

IHT is not always an immediately obvious priority, but it is important to think about the IHT position in the event that one of the beneficial owners die or following the gift of the land. Land is an asset that may be protected from IHT through reliefs such as Agricultural Relief (AR) and Business Relief (BR). Without any reliefs the full value may be subject to IHT at 40%. However, once sold, the landowner may now have a significant sum of cash which does not qualify for any IHT relief.

AR can assist when calculating the agricultural value of land but does not cover any development or hope value. Following a successful planning application, the market value of the land is likely to have increased and be far more than the agricultural value.

BR can assist with the development value where the land is held as part of a trading business, although as with AR, there are various requirements which need to be met to secure this. If AR or BR are not available, any IHT liability will need to be funded and so this should also be considered if necessary. Life insurance may be one option to fund this.

Succession and Estate Planning

A landowner should review its lifetime estate planning regularly as part of an ongoing process. Where land has development potential, succession planning should be reviewed at an early stage. Depending on the landowner's wishes it may be beneficial to gift the land, either outright or to a trust, prior to planning permission being granted, whilst ensuring sufficient assets to be financially secure for the remainder of its lifetime.

Landowners should ensure that they have an up to date Will (and letter of wishes as required) which best utilises IHT reliefs, reflects their wishes and the succession planning intentions and maximises flexibility.

It is also important to consider a financial Lasting Power of Attorney (if one or an Enduring Power of Attorney is not already in place) so that suitable arrangements are in place should the landowner lose the capacity to make decisions. If a power of attorney is not in place, an application will need to be made to the Court which is a lengthy and expensive process.

Summary

It is crucial that the formal legal documentation reflects the true position on the ground and the current wishes of the landowner. We discuss additional on the ground considerations when preparing land for sale and development in our article.

Forward thinking and planning are essential to avoid any adverse tax consequences as some options may no longer be viable if left too late. It is important all professional advisors, such as lawyers, land agents and accountants work together otherwise tax reliefs may be jeopardised.