UK: The New Planning Gain Supplement: Development Tax and Infrastructure

Last Updated: 9 January 2006
Article by Ian Hyde

The Government has now published a consultative document on the introduction of a Planning Gain Supplement (PGS) as proposed by the Barker Report last year. The intention is to tax the increase in land value resulting from detailed planning consent. For developers this will in part replace the cost of section 106 obligations but the Government has acknowledged that PGS will be more expensive and is a key part of the radical shake up of the planning process which is planned in the next few years.


Given the Government's overall reform agenda and the added impetus of the Treasury being behind these proposals, we believe that this proposal is likely to be implemented. Whilst ultimately it is likely to be landowners who will end up paying the increased costs through lower prices paid by developers, we recommend that the property and development industry should concentrate on making constructive representations to ensure the tax is workable and as fair as it can be.

Responses to the consultation document are required by 26 February 2006 and we set out in this bulletin our views on the significant issues which will affect parties to the planning and development process. The consultation period is very short even without the Christmas break.

For those not responding directly to the consultation, we would be pleased to receive comments to add to our response to the consultation. A full copy of the consultative document can be found on the attached link

Key Points of the PGS

Introduction Date

PGS is intended to apply from 2008, though the precise date is not yet confirmed. It is recognised that there will need to be transitional arrangements to enable the market to adjust, including exempting planning permissions obtained before a yet to be specified date.

Planning Gain

The tax is intended to apply to the ‘planning gain’ which will mean the difference between the land value with full planning permission and the value of the land immediately before the consent was granted. Any Section 106 contributions and remediation costs would be taken into account. The Government prefers to use ‘actual’ rather than ‘average’ valuations.

Rate of Tax

The rate of tax has not been set but is intended to apply equally to residential and non-residential development. The Government is at pains to say that its portion will be ‘modest’. The Government is considering a lower rate of tax for brownfield development.

Thresholds and Exemptions

It is intended PGS will apply to all planning permissions except home improvements. The Government will consider thresholds to exclude small scale improvements on commercial properties and perhaps small developments but generally is against adding complexity. No other exemptions are proposed.

Liability to Pay

The tax will only become payable once development is about to start.

The proposals do not identify who is liable to pay the tax but instead relies on a party - usually the developer - offering to pay. This will be done by serving a ‘Development Start Notice’ which identifies that person as the ‘chargeable person’ for the tax. The reason why they will do so is that it will be unlawful for development to start without serving such a notice and ‘stop’ notices could be served.

Interaction with Other Taxes

PGS will apply in addition to other taxes although the Government is considering allowing a tax deduction for PGS against income tax or CGT. This is only a partial relief reducing profits not a credit against tax due.

Self Assessment

The tax will be paid by filing with HMRC a PGS return along with payment within a specified period of development commencing. The return will include the chargeable person's self assessment of the relevant property values.

Reducing Planning Obligations

It is intended to reduce the scope of planning obligations to those matters that relate specifically to the environment of the development site and affordable housing. These remaining areas will be statutorily defined. The cost of infrastructure improvements previously covered by planning obligations is intended to be financed by the allocation of PGS proceeds to local authorities (see below). The intention is for there to be a greater emphasis on Local Development Frameworks and ‘joining up’ between statutory bodies.

Pending the introduction of PGS local planning authorities are being encouraged to implement ODPM Circular 5/05 to streamline negotiation of planning obligations and introduce a greater consistency across the country.

Use of PGS Revenues

The Government wishes to raise more money to invest in community development, high quality public services and additional social housing. PGS is intended to provide these revenues and accordingly PGS revenues will exceed the foregone planning obligations.

PGS will be collected centrally by HMRC, but the consultative document anticipates that a ‘significant majority’ of PGS revenues will be recycled back to the local community with the ‘overwhelming majority’ returning to the ‘region’ from which they derived. However, the mechanism for doing so is not clear. The Government proposes either grant funding in direct proportion to PGS revenues from the local area or on the basis of a formula using for example, the level of development in the area. There is concern over areas where values are higher (e.g. the South East) getting a disproportionately high amount in comparison to less well off parts of the country where values are lower.

A significant proportion of the revenues would be used to deliver strategic local and regional infrastructure projects through an expanded Community Infrastructure Fund.

Implications for Stakeholders

PGS will have major implications for key stakeholders in property development and regeneration:


Developers, as the likely taxpayers under PGS, will need to review how they structure developments and approach the planning process but they will definitely pay more tax which inevitably will be passed on to landowners through lower prices.

Given the long gestation period for some larger planning permissions and section 106 agreements (particularly for hybrid outline and full permissions for major projects), it is imperative that the Government clarifies the transitional rules at the earliest opportunity to provide developers with certainty. Indeed, 2008 as a commencement date is already rather early for major planning schemes already in the pipeline which will have been costed and appraised but where detailed planning permission may not actually be granted until 2008 or later. For those involved in long term projects (particularly where the land is not yet secured with binding contracts) the transitional provisions may not give adequate protection. The Olympics site and a variety of new town projects we are involved in are clearly topical examples.

However, it is pleasing that the Government does recognise the difficulties arising from a phased implementation of detailed planning permission of a major strategic site. A solution which triggers PGS on a phased basis will be needed to ensure the financial viability of larger projects. It will be interesting to see if there might be a ‘rush’ of smaller scale applications (rather than one large application) coming in for large sites to try and achieve the grant of as many full permissions as possible prior to the 2008 date.

The ability of a developer to carry out minimal works to keep planning permissions alive will, in practice, be severely curtailed as the ‘Development Start’ will trigger the PGS liability.We are assuming that the ‘Development Start’ will equate to the legal definition of ‘implementation’ but that will need clarification.

In addition, developers and local authorities will lose some of the useful flexibility to stagger financial contributions throughout the life of the development and lose some certainty over the provision of some specific facilities, for example schools, which would previously have been covered by a section 106 agreement.

Developers will need to consider their approach to the valuations required to discharge the PGS liability. Clearly it would be preferable if these were done at the time of the grant of the full planning permission. However, any developer buying a site with permission will need access to earlier valuations and comfort that they are reliable.

Local Planning Authorities

Whilst there is a prospect of significant revenues for LPAs to replace the value of planning obligations, it is not clear what control they will have over central government allocations of PGS revenues which may be a concern to some LPAs. Local Authorities will be very concerned as to how payment of PGS back to the regions will affect the funds currently made available by Central Government to the regions in relation to infrastructure which is not site specific.

The proposed split between the areas to be covered by the proposed restricted section 106 agreements and the PGS appears broadly sensible. However, to avoid confusion and arguments, potential overlaps between categories will need to be eliminated with detailed guidance.

LPAs may face increased pressures from developers and landowners to grant permission in the run up to the introduction of the new tax.

LPAs may also need more resources if they are the ones chosen to enforce payment of PGS by stop notices. The Consultation Paper suggests there may also be a potential expansion of the scope of Section 278 Highways Agreements to cover (presumably transport-related) planning obligations. This would increase the power of Local Highways Authorities.

Social Housing Providers and Voluntary Bodies

Since this tax will apply to residential development, there is concern it may run counter to the Government's objective of providing increased social and affordable housing. Whilst the Government appears to be against exemptions, there must be a case for pressing for exemptions for RSLs, charities and public bodies, as is the case with many other taxes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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