Planning gain supplement – The new consultation paper

On 5 December the Government published the long-awaited consultation paper relating to a planning gain supplement ("PGS").

The purpose of this new tax is to capture a "modest portion" of the increase in value of land arising from the grant of planning permission. This tax will then be shared out with local authorities to provide infrastructure and community facilities.

PGS clearly has potentially serious implications for the property industry. The consultation period expires on 27 February 2006 so there is plenty of time for the industry to put in a measured and considered response to the various proposals.

On 5 December the Government published the long-awaited consultation paper relating to a planning gain supplement ("PGS").

The purpose of this new tax is to capture a "modest portion" of the increase in value of land arising from the grant of planning permission. This tax will then be shared out with local authorities to provide infrastructure and community facilities.

The main features of PGS are:

• PGS will not be implemented before 2008.

• The tax will relate to residential and commercial development.

• PGS is based on the increase in value arising from a "full" planning permission – the paper makes no mention of outline permissions/reserved matters’ approvals.

• PGS will be payable in one lump sum upon commencement of the development (which presumably has the normal Planning Acts meaning).

• The percentage of the tax has yet to be fixed and there may well be a lower tariff for brown field sites.

• Payment will be by way of a self assessment regime with the person who is liable to pay the tax actually determining the increase in value. When looking at the value it is assumed that the property is valued as a freehold with vacant possession.

• There will be penalties and interest regime for defaulters. As a final sanction parties who have implemented a planning permission without paying the tax could be forced to stop work.

• Section 106 obligations will be scaled back and in future these obligations would only relate to the "environment of the development site" itself and affordable housing. Contributions towards all off site facilities (such as schools, hospitals, highways, etc) would all be dealt with by way of the PGS.

A few of the more obvious issues for the industry to comment on/consider include:

• Because the tax is payable by one lump sum there will be adverse cash flow consequences for developers where similar payments under the section 106 agreement would normally have been payable in phases (for example on occupation of a specific number of units).

• There are no proposed arrangements for reimbursement of PGS in the event of the monies not actually being used to provide the community facilities.

• Where there are a number of parties interested in the outcome of a development e.g. in a forward funding, who is the chargeable person for the purposes of PGS?

• Should outline or reserved matters approval trigger a payment?

• How will the tax operate on large phased developments where there may be a series of planning permissions granted over a period of years?

• Is the proposed freehold valuation approach correct?

• Developers will also want to consider in the run up to PGS being implemented exactly what strategies they wish to adopt in relation to either obtaining or implementing any planning permission so as to minimise their potential PGS liability.

PGS clearly has potentially serious implications for the property industry. The consultation period expires on 27 February 2006 so there is plenty of time for the industry to put in a measured and considered response to the various proposals.

To view the full consultation paper, please click here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 08/12/2005.