Charity Law Association

Response to the HM Treasury, HM Revenue and Customs and the office of the Deputy Prime Minister

Planning-gain Supplement: A consultation December 2005

Introduction

The CLA has over 700 members, mainly lawyers but also accountants and charity professionals. It is concerned with all aspects of the law relating to charities, and has established a working party to consider property issues affecting charities. This working party has considered the Planning-gain Supplement: a

consultation. The members of the working party are:-

Ros Harwood – Dickinson Dees (Chair)

Francesca Quint – 11 Old Square

Gerry Morrison – Rollits

Hugh Pearce – Stone King

Val James - Wrigleys

The CLA has examined the consultation document on the Planning Gain Supplement (“PGS”) as proposed by the Barker Report last year. We understand that the PGS is intended to help the Government in achieving its objective of improving housing supply by offering everyone the opportunity to live in a decent home at an affordable price.

The proposed PGS will capture a “modest” portion of the uplift in land value created by planning decisions (i.e. on land for which full planning permission has been granted). It is intended that the PGS will release a portion of the benefit of this uplift to finance the infrastructure needed to regenerate and support local communities (e.g. local amenities such as recreation facilities, parks, schools and transport etc) alongside good quality and affordable housing.

The consultation document states “the PGS will be largely a local measure, its proceeds recycled to the local level for local priorities and for the vital strategic infrastructure needed for new development”¹. Therefore, it is intended that the PGS will benefit local communities by giving them a fair share in the benefits that growth through development brings.

The CLA has the following concerns in relation to how the proposed PGS will affect charities and housing associations:-

1. The PGS would apply to the “planning gain”, which would be the difference between the value of the land with full planning permission and the value of the land immediately before full planning permission was granted. It is proposed that the PGS will be payable by “the developer” when development of the land begins.

The consultation document defines “the developer” as “the active party intending to carry out development”² and states that this definition covers “all those carrying out development, whether commercial property developers, businesses, individuals or other organisations”³.

It is proposed that the PGS will apply to residential as well as commercial development. Therefore, housing associations and charities that develop land themselves to provide affordable housing and amenities for local communities will be liable to pay PGS when development begins.

The consultation document proposes no exemption or relief for housing associations or charities who are developing land themselves for the community benefit. Such organisations are vital in helping the Government deliver its objective of increasing affordable housing and regenerating local communities and the PGS would tax these organisations for fulfilling their purposes.

Housing associations and charities are already providing community benefit and are assisting the Government by developing land so that more people can live in decent homes at prices they can afford. Many such organisations also develop land to provide much needed leisure and recreational facilities for the benefit of local communities. The benefit received by such organisations, via the uplift in the value of the land with full planning permission, is not used for private benefit, but is actively applied for the benefit of the local community. In addition, the proposed set-off provisions where PGS is paid by the developer will not alleviate the impact of PGS for the developer charity, as charities do not pay capital gains tax or corporation tax. In fact, charities and housing associations would be positively discriminated against.

2. Some charities may not develop land themselves as part of their charitable objects (i.e. for affordable housing or community amenities), but may hold land that forms the main basis of their endowment. Many such charities rely on an increase in the capital value of their land to keep up the real value of their endowment. Furthermore, many charities whose only major asset is their land, who have dwindling financial resources and are finding it difficult to support their charitable activities, ultimately rely on the sale of their land to developers to secure their future viability.

The consultation document acknowledges that the Barker Report concluded that in most cases, the developer would pass the cost of the PGS back to the landowner through lower prices bid for land⁴. The consultation document offers some comfort for landowners in that due to the amount a landowner will receive from the sale of development land being lower (i.e. because a developer has factored the cost of the PGS into the land price), landowners will be taxed on a potentially smaller gain than if PGS had not been a factor.

However, charities are exempt from capital gains tax provided they apply the proceeds of their capital gains to support their charitable activities. Therefore, this is of little comfort or benefit to charities whose only major asset is their land and who desperately need to raise funds by selling land for development to support their charitable activities. Such charities will receive less from developers for their land, because developers will factor the PGS into the acquisition price.

3. Charities are exempt from paying SDLT, capital gains tax and benefit from income/corporation tax relief. It is proposed that the PGS will be collected centrally by HM Revenue & Customs, but the consultation document states that a majority of the Revenue raised from the PGS will be ploughed back into the local community to put in place the necessary infrastructure required for new development (e.g. new schools, recreational facilities etc).

The consultation document is unclear as to how PGS revenue will be diverted back to the local community if it is collected centrally by HM Revenue & Customs and it puts forward a number of options.

Proposed mechanisms for “recycling revenues” from the PGS back to the local community are grant funding in direct proportion to PGS revenues from the local area, or on the basis of a formula using the level of development in the area.

The consultation document states that the Government anticipates that an overwhelming majority of revenue raised through the PGS will be utilised within the region from which it derived.

Charities and housing associations that develop their own land operate on a local level to regenerate the local community by the development of affordable housing and public amenities such as recreational grounds and sports facilities etc. As before, any uplift on the value arising on development land is used by such organisations for the benefit of the wider community and not for private benefit. In such circumstances, it seems illogical having the PGS collected centrally by HM Revenue & Customs from such organisations and then “recycled back” to the local communities in which they are operating in the first place.

4. In addition to the proposed PGS, charities and housing associations already face the potential burden of an income or corporation tax charge under section 776 of the Income and Corporation Taxes Act 1988. Therefore, the introduction of the PGS will doubly hit charities and housing associations.

5. A straightforward exemption will only benefit charities or housing associations developing land themselves. Therefore, the Government should also consider exempting land purchased from charities from the PGS, or at least consider a substantially lower rate for land purchased from charities as has already been suggested in relation to the development of brownfield sites.

6. If an exemption is granted to charities and housing associations, the paperwork should be kept simple and to a minimum to avoid similar problems as experienced by charities in relation to the completion and submission of complicated SDLT return forms.

We believe that an exemption for charities and housing associations would be highly beneficial because such organisations are vital in helping the Government achieve its objective of providing affordable housing and decent homes for all and regenerating local communities.

February 2006