Government Publishes Proposals for Planning Gain Supplement - International Law Office

Cost
Impact
Remaining Issues

The government has proposed a new system for collecting contributions from developers towards local infrastructure. The Planning Gain Supplement would be charged on the increase in land value resulting from the granting of planning permission.

The supplement has been heralded as a faster, fairer and more user-friendly system than the regime of negotiated planning obligations. It is also generally considered preferable to a system of planning charges, which was given a legislative framework in the Planning Act 2004. However, some commentators are more cautious, remembering the previous experiences of development tax, which stifled development with its complexity and high rates. The government has issued a consultation paper on its proposals; the deadline for responses is February 27 2006.

Cost

The government proposes to charge the supplement on the increase in the value of land resulting from the granting of planning permission. The increase in value would be the difference between the 'current use value', defined as the market value of the land immediately before full planning permission is granted, and the 'planning value', defined as the market value of the land with full planning permission.

The consultation paper gives no indication of the rate at which the supplement will be charged, stating only that it will be "modest". However, many industry commentators expect a standard rate of 20% to be applied. The government must avoid discouraging development by setting too high a rate, which was a feature of the development tax, and is considering whether a lower rate should apply to brownfield sites as an incentive for regeneration.

The supplement would be paid on commencement of development by the party wishing to carry out the development. The developer would be required to notify Her Majesty's Revenue and Customs before development begins by lodging a statutory start notice and completing a self-assessment of its liability. Development could not lawfully proceed until after assessment and payment. Interest would be charged on late payments and underpayments. The start notice and supplement liability could be registered as a local land charge to secure payment and give notice of an unpaid supplement to a prospective buyer or lender.

Central government would allocate the majority of its receipts to local authorities to finance local infrastructure projects. Such projects include the provision of:

• education;

• healthcare;

• community resources;

• leisure and cultural facilities;

• bus services;

• labour initiatives; and

• town-centre management.

Some of the money would be applied centrally for strategic infrastructure projects, such as roads.

As many of these items are secured through planning obligations, it is proposed that the scope of the obligations be scaled back, applying only to those issues which relate to (i) the safety, sustainability, quality and accessibility of the development site and its environment, and (ii) requirements for affordable housing.

Impact

It is assumed that the supplement will be introduced from January 1 2008, subject to the results of the consultation. All transactions (including options) that anticipate planning or development of land on or after that date will need to take account of the potential impact of the supplement on purchase price, gearing, profit share and overage.

The purchaser of a development site will view the supplement as an additional development cost and may wish to negotiate an appropriate reduction in purchase price, so that the seller effectively bears the additional charge. Alternatively, the cost could be transferred to the purchaser or occupier of the developed site. The government believes that, after an initial flurry of reaction, the supplement will simply be incorporated into land valuations without specific reference to the party responsible for bearing the cost.

Until the outcome of the consultation is made available later in the year, speculation about ways of mitigating the impact will increase further. One possibility could be to take steps to increase the current use value of a site and thereby reduce the gain. This could be done by obtaining planning permission before January 1 2008, even if there is no intention to act on that permission. If, as is generally assumed, the supplement will not be applied retrospectively, planning permission obtained before its introduction will not trigger liability.

Remaining Issues

A number of other factors may influence the impact of and reaction to the supplement:

• The supplement would apply to all land, whether commercial or residential, greenfield or brownfield.

• It would be charged on the whole development site, irrespective of ownership.

• It would be payable at the commencement of development, irrespective of how the development is phased, which might require developers to apply for permission more than once for a single site.

• There is no indication of how 'commencement of development' will be defined for the purpose of the supplement. If the definition is the same as that applied in respect of the planning acts, any action to 'safeguard' a permission will trigger the tax.

• In the absence of a guarantee that the supplement paid to central government will be returned to councils and applied to local infrastructure, there is a risk that developers may lose the controls over the provision of the infrastructure for which they pay, guaranteed at present by Section 106 of the Town and Country Planning Act 1990.

• Although the scope of Section 106 is to be cut back, it remains uncertain whether planning authorities will still be able to impose planning conditions to restrict development until certain infrastructure is provided by a developer.

• Lenders and other development funders will need to consider the potential impact on their security of an unpaid or underpaid supplement.

• Joint developers will need to consider and document the consequences of the application of the supplement to their development (eg, the insolvency of a partner or a disagreement over liability).

For further information on this topic please contact Richard Vernon at Ashurst by telephone (+44 20 7638 1111) or by fax (+44 20 7638 1112) or by email (richard.vernon@ashurst.com).