Planning Gain Supplement

COMMERCIAL PROPERTY / CONSTRUCTION

Planning Gain Supplement

A new tax on the property industry. Graham Pierce outlines the latest position.

The Government's Barker Review published in March 2004 recommended the introduction of a "planning gain supplement" (PGS) based on the uplift in land value following the grant of planning permission. In December 2005 Government issued a consultation paper setting out detailed proposals for PGS. The consultation period closed on 27 February 2006 and despite some very critical responses by various industry bodies, the Chancellor's Budget Report of March this year reaffirmed Government's continuing interest in the introduction of PGS. Government tells us that discussions with stakeholders are continuing and expects to make further announcements on the implementation of PGS by the end of this year.

The proposals

PGS would be assessed on the planning gain, being the difference between the land value with the benefit of the planning permission and the current use land value. Value would be assessed on the basis of a freehold interest with vacant possession and the date of valuation would be the date of the grant of planning permission.

PGS will affect all land, including commercial and residential.

Although the liability to pay the tax would be triggered by the grant of full planning permission, the payment would not actually fall due until the development commences.

Government has not indicated at what rate the tax would be charged but it will be "modest" and press comment has settled around 20%.

The use of planning obligations under Article 40 of the Planning (NI) Order 1991 would be scaled back.

PGS would create revenue 'the majority' of which would be channeled back by HMRC to local level. A proportion would also be used to fund major infrastructure work.

PGS would not be implemented before 2008.

Some readers may recall the introduction of Development Gains Tax (1967) and Development Land Tax (1976) both of which were attempts by Government to tax rising land values. There was widespread avoidance of both taxes and both were by general consensus a disaster. Government is keen to ensure that avoidance of PGS is all but impossible and will take encouragement from its recent successes in clamping down on stamp duty avoidance.

There are expected to be exemptions for minor developments such as home improvements, for charities and possibly for PFI type schemes.

The person liable for payment of the tax will be the one who commences the development and of course that might not be the landowner or the person who obtained the planning permission.

Issues

The property industry has been quick to point to numerous potential problems and inadequacies in PGS including: how and when the taxable uplift should be calculated in circumstances where planning permission is revoked, substituted or amended; whether implementing a change of use (as distinct from construction works) pursuant to a planning permission triggers a liability to PGS; what happens if land is sold at a lower value than the PGS valuation, for example, in a forced sale scenario?; if a development remains unfinished there is no provision for full or partial refund of tax; would the off-site infrastructure works which currently are paid for under Article 40 Agreements in fact be delivered?; and will a developer who incurs a PGS liability be able to claim tax relief on the PGS paid as an allowable business expense.

The way ahead?

Several commentators have predicted a rush to develop before PGS is introduced in 2008 while others advise waiting until after the next election.The Conservative party has not, however, committed to abandoning the proposed tax and may introduce a similar tax of its own on land value uplifts.

The property industry is deeply concerned as to whether PGS can be workable. Many believe Government should drop PGS in favour of changes to the existing system of Article 40 Agreements, such as introducing 'flat rate' tariffs which are beginning to emerge in some English towns. Whichever way Government elects to proceed, the present uncertainty is a cause for concern in itself. The property industry can only hope for a swift response from Government to the representations made.

Graham is a Partner in the firm's Commercial Property Department advising on a wide range of property matters including investment, development and construction. He has over 16 years experience working in commercial property in Northern Ireland.

Graham can be contacted at graham.pierce@lestrangeandbrett.com

Quote: PGS will compromise the viability of developments