There is an everchanging shift in the agricultural industry, consumers want cheap food with high welfare standards (or so they say), the government wants to build more houses; and the number of industrial buildings being erected for the likes of Amazon and Aldi etc for distribution centres is on the rise. The post Brexit trade deals are still yet to hit the UK, however in a few years we could be overrun with cheaper imported foods and with an ever-growing population more houses will be required. The most favourable sites for development are brownfield, which are now being built on already, this will result in more agricultural land being built on i.e. greenfield sites.
Selling agricultural land to be developed or obtaining planning permission to then sell to a developer is not quick or easy, but if it was everyone would try. Providing it’s not in the greenbelt, has good access, there is local demand then there is strong likelihood the Council would grant planning permission.
In this post, we’ll provide an all-encompassing summary of development land, including an explanation of why selling your land may be important, how best to change agricultural land to residential/ commercial use and the tax implications of selling development land.
In most circumstances a landowner would enter into a promotion or option agreement to sell the land. You may wish to obtain planning permission yourself and sell it on to a developer or enter a joint venture. In this post we are concentrating on the most common methods of selling land for development.
WHAT IS DEVELOPMENT LAND (AND WHY DOES IT MATTER)?
Development land refers to land for which an alternative use may be considered. In this post we are working on the basis that the land has the potential to be built on for either residential purposes or commercial uses such as industrial warehouses. Development land could also include solar farms, battery storage sites, car parks or office space.
The reason why development land is important is that ultimately it is a huge asset (financially), but the potential issues involved with getting it over the line to sale could be years of a liability (from a stress and hassle point of view). Ultimately you only sell this land once, and ensuring your position is protected from the outset, should be at the heart of any agent’s advice. The headline figures on agreements are what everyone is drawn to, however the finer detail could include matters that you didn’t really think you had signed up to.
For example you would not want to find your self in the same position as the owner a site, where the developer was looking to negotiate down the price.
FREQUENTLY ASKED QUESTIONS
WHAT IS A PROMOTION AGREEMENT?
An agreement between the landowner and a promoter (a specialist in planning to promote the land through the planning process) to submit and obtain planning permission for the development site. The promoter is responsible for all the planning application costs; the landowner does not incur any costs for the planning application. On the granting of planning permission, the land is now a development site with planning permission and is sold onto a developer. The promoter does not purchase the land and in effect promotes it for sale. A developer would then buy the development from the landowner and the landowner would pay the promoter a proportion of the sale proceeds.
WHAT IS AN OPTION AGREEMENT?
An agreement between the land owner and a developer (a house builder – either a national firm or more local firm for smaller sites less than 10 acres). In this instance the developer would look to obtain planning permission for the site and be responsible for any planning application costs (in most cases these are eventually deducted off the final sale price). The granting of planning permission, triggers a sale to the developer who pays the landowner and the purchaser builds the development.
WHAT ARE HEADS OF TERMS?
Prior to entering into a Promotion/ Option Agreement, Heads of Terms would be issued by the promoter or the developer. These outline the content of the agreements and include the names of landowner, promoter/promoter, agent and solicitor, the site address, option/ promotion fee (for signing), promoter’s % of sale proceeds, developers price per acre/ etc. It is key to either agreement that the Heads of Terms are scrutinised as they will form the basis of legal documents and once signed are almost impossible to amend.
WHAT IS A 106 AGREEMENT?
As part of any large development site, the local Council will impose a legal agreement on a developer in relation to what measures must be undertaken to reduce the impact on the local community. This is a section 106 Agreement. The costs of undertaking the requirements of a 106 Agreement can be substantial. Examples of obligations under a 106 Agreement include new schools, affordable housing, playing fields, flood mitigation or local highways. It is imperative to have an understanding of how the obligations will be undertaken and which party will bear the costs.
“With Bio-diversity Net Gain coming in in January 2024 (was November), anyone who is thinking of entering into an option or a promotion agreement should consider the biodiversity on the land. The more biodiversity, the more that has to be replaced ”
Tom Selby - Selby Rural
Arable land cultivated for agricultural crops, winter stubble, temporary grass and clover leys, as well as modified grassland (improved grass), all exhibit a "low" level of distinctiveness. In terms of replacement, this implies that you require something with the same level of distinctiveness or higher, but it doesn't necessarily have to be the same type of habitat. On the other hand, arable land used for purposes such as game bird mix or pollen & nectar mix falls under the category of medium distinctiveness and is assigned a score of 4. This indicates that you should replace these habitats with either the same broad habitat type or one with a higher level of distinctiveness. Therefore, when assessing the current land use, it is not critical whether it is under cultivation or in a grass ley, but it is advisable to avoid stewardship options if you are aiming for the lowest baseline of distinctiveness..
THE PROS AND CONS OF PROMOTION AND OPTION AGREEMENTS
PROMOTION AGREEMENT
PROS
- No planning application costs for the landowner
- The promoter undertakes the planning application
- If planning permission is not granted the landowner does not pay any costs
- A local & experienced promoter can utilise their knowledge of local planning policy
- The landowner and promoter are looking to achieve the best sale price
- An increased chance of a quick sale
- The promoter is incentivised to push matters forward
CONS
- The promoter will want a considerable percentage of the sale
- The landowner may not be able to terminate the agreement
- It can tie the land up for a number of years prior to the sale
- If not selling to a preferred developer or if there is a downturn in the market, the landowner may not receive what they wanted
- The developer could land bank it, and try to push other local sites forward first
OPTION AGREEMENT
PROS
- No planning application costs for the landowner
- The developer undertakes the planning application
- If planning permission is not granted the landowner does not pay any costs
- Once planning permission is granted a sale should follow on pre-agreed terms
- The landowner does not have to go the open market to sell (this can also be negative as there is no competition at the point of sale)
CONS
- The landowner may not be able to terminate the agreement
- It can tie the land up for a number of years
- The developer could land bank it, and try to push other local sites forward first
- Legal, professional and Section 106 costs could be deducted off the final sale price
The diagrams above are from the point that a promoter/ developer has expressed an interest in the land and is keen to secure an agreement with the landowner. In most cases a land agent and solicitor would act on behalf of a landowner.
As you can see from the two methods of selling development land, both are time consuming and require specialist knowledge and advise. The benefit of a Promotion or Option Agreement is ultimately that there is no cost or little risk to the landowner.
The same mantra applies to the physical submission of the planning application; this is a specialist area of expertise.
NATIONAL & LOCAL PLANNING POLICY
If you are considering changing the use of your land, this would have to be in accordance with National and Local Planning Policy. There are considerable other factors that are out of your control such as:
- Land grade – Councils do not wish to use grade 1 or grade 2 land for development
- Nutrient neutrality – If Natural England advise a local planning authority, they will be required to prevent new dwellings from adding water runoff in relation to phosphates and nitrates
- Water Neutrality (this currently only impacts south east England) – development must not increase the rate of water abstraction for drinking water supplies above existing levels.
- Bio-diversity net gain – whereby developers look to secure land to purchase or acquire on a long lease to offset the loss of biodiversity from their development. At present any housing development must provide a biodiversity net gain of 10%. if this cannot be provided on the development site, it will have to be provided off site. This can result in development land being used for biodiversity, but you could argue, it’s as valuable (if not more) than the land being built on – without it there is no development at all.
- Access – can the site be accessed from an existing highway and is the visibility suitable both directions?
If considering changing the use of the land our advice is to engage a specialist planning consultant to look at the feasibility of the change of use prior to incurring a lot of time and cost.
TAX IMPLICATIONS OF SELLING DEVELOPMENT LAND
When it comes to selling any type of property there is unfortunately going to be some tax to pay; however with early professional tax planning advice this can be mitigated against (please note we are not accountants and anyone selling development land should take accountancy advice).
On the basis that the development land is being sold with the benefit of planning permission, it is now worth considerably more than just an agricultural field. There then lies the potential for a capital gains tax (CGT) bill, as the land has increased in value since it was transferred or purchased. To calculate the gain, you deduct the purchase cost, any qualifying improvement expenditure and incidental costs of purchase or sale from the sale price.
If the development land is owned by an individual, the gain is taxed at 20% if it falls above the higher rate of income tax threshold, or 10% if it falls within the basic rate band. If the land is held by a company, the gain would in most cases be subject to corporation tax.
The good news is that in some circumstances there are reliefs available in relation to capital gains tax:
Business Asset Disposal Relief (previously referred to as Entrepreneurs Relief)
If you sell the land and have been running a business (such as farming the land) for at least 2 years from the date of sale and you then cease trading of the whole business, you could reduce the capital gains tax by up to £1million. An example of this would be to have the land in a separate ownership and the contract farmed. The owner is farming the land and owns the crops and employs a contractor to undertake the day to day work. The farmer sells then crops and the contractor charges for all their works. Thus the land owner is trading and could qualify for this relief.
Rollover Relief
Applies when trading assets (land) are sold and new trading assets are purchased using the proceeds. It is available to both individuals and companies. In this instance if the land was sold, the landowner acquired another block of land and continued to trade on it (i.e. farm the land and not just rent it out). They can defer paying the capital gains tax until the land is sold later.
Holdover relief
Applies when you sell or give land at a reduced rate to benefit the recipient. Therefore, you do not have to pay any tax on the gain in value, it is up to the new owner to pay the CGT based on the lower value received or original cost if transferred in the future.
As you have read above, selling development land or entering into agreements with promoters or developers is not a simple or quick process, with a number of external factors that can impact the potential change of use. The tax implications can be significant and we have years of experience producing agreements to meet these requirements to assist with CGT matters.
Contacting promoter and developers on a private and confidential basis is a good way to gauge the market, and doing it sooner rather than later means that both landowners and developers can prepare.
If you believe your land may have some potential of being developed or if you are looking to maximise the value of your land prior to selling, we can of course assist you. Please do not hesitate to contact us.
01829 423 183