Planning Gain Supplement: What Should You Do Now?

The consultation period for planning gain supplement has now closed but the property industry should not wait to see the Government's response before taking action.

If the tax is to be introduced in 2008 then contracts and other arrangements being entered into now may need to be ‘PGS proof’ as failure to do so may expose parties to extra costs and uncertainty.

Consultation Response

It appears that there is a considerable groundswell of fundamental opposition to the new tax even though many recognise the need to cure some or all of the problems which are intended to be addressed by the additional revenues raised.

Further there are significant concerns about the proposed structure of the tax and whether it can work. Our detailed response on these questions can be found at http://www.pinsentmasons.com/media/1826210483.pdf.

A copy of the Government's consultation document can be found at http://www.hm-treasury.gov.uk/pre-budget-report.

Whilst many doubt that the new tax will be introduced and 2008 may seem a long way away, we believe that all landowners, developers and other parties to property development transactions should nevertheless take steps now to protect themselves against the new tax. Here are a few suggestions.

It is likely that the transitional rules will exempt developments where full planning applications have been obtained before a specified date. Where possible therefore full applications should be brought forward. Where an application cannot realistically be made for a whole site then consider smaller applications.

It remains unclear at the moment how valuations for PGS purposes will take into account allocation in local plans or the impact of obtaining outline consent so, if obtaining full planning permission is not regarded as a viable option prior to 2008, capturing as much value uplift as possible prior to 2008 through such other measures may assist in minimising the impact of tax.

We do not know what the transitional rules will be but it is unlikely that the legislation will interfere with or modify contracts already entered into. Accordingly landowners and developers should consider making express provision for who bears the cost of any PGS. This could be a simple clause or, in a more detailed version, provide for the risk of post return audits and issues such as the provision of information on or warranties in respect of or reliance on valuations. Consideration should be given to prices agreed under contracts now where completion of the sale and purchase is conditional upon planning. Where this is unlikely to occur before 2008 the opportunity to deduct all or part of the PGS from the purchase price will be lost unless raised in negotiations now.

Similarly, where there is an overage or other profit share arrangement, it is unlikely unless express provision is made that PGS will be allowed as a cost in the calculation and parties should therefore review whether this is appropriate or not.

In joint venture arrangements, particularly contractual joint ventures, parties should consider not only where the burden of the tax will fall but also which party will volunteer under the proposed Development Start Notice procedure to pay the PGS and accept the administrative and compliance burden. The party that does so would expect to have some indemnity to cover any exposure beyond the agreed cost allocation.

Under the proposed PGS regime, section 106 agreements will be curtailed but there is a risk that anyone entering into section 106 agreements now which may still be applicable in 2008 may be exposed both to 106 obligations and also the new tax. Whilst it is hoped that this potential double jeopardy will be covered by transitional rules, parties may wish to negotiate with the local planning authority the ability to reduce their section 106 obligations should PGS be introduced.

Given it is proposed that failure to pay PGS may lead to Development Stop Notices being served, lenders and other funders may be concerned to ensure that failure to pay the tax does not make the development grind to a halt. Therefore specific conditions and perhaps loan and grant retention arrangements might be appropriate.

We will be monitoring the Government's response to the consultation exercise, expected to be published in the Summer, but in the meantime there are a number of sensible steps which those in the property industry should be taking to protect their position.