Bell & Scott

In this month's issue we comment on a recent report published by the Scottish Executive on planning agreements. We also look at schemes for saving stamp duty using SPV’s and Unit Trusts and consider the likely effect of the recent growth in the market for property derivatives.

Planning Agreements and Positive Planning for Sustainable Communities in Scotland

This report published last month by the Scottish Executive is based on research carried out between January and March 2004 and considers how the planning system might deal with Section 75 Agreements, planning obligations and planning gain in the proposed Planning Bill. The Report also advises on planning policy and best practice advice and considers planning agreements as a means of facilitating affordable housing.

The new Bill should retain planning agreement clauses. However these should be rewritten to explicitly set the parameters of necessity, proportionality and reasonableness as presently expressed in Circular 12/1996.
Circular 12/1996 will need to be updated, and should emphasise the role of conditions as control measures of first resort.
The new Bill should provide for the introduction of powers and provisions relating to the payment of unilateral obligations, arbitration, appeal, review and annulment.
Heads of agreement should be clearly set out and justified in the officer's report to Committee in sufficient detail so that the applicant, Members, consultees, and objectors can have confidence in the proposed boundaries of the agreement negotiations.
Applicants/developers should be able to expect a monetary contribution sought for a specific purpose to be applied to the delivery of that purpose, within an agreed timescale.
It is appropriate that only the parties to the agreement negotiate planning agreements with no direct involvement by interested third parties however public confidence in the process could be improved:
- policy and procedure in respect of planning agreements should be specified in local plans, action plans and supplementary planning guidance

periodic information reports to Committee outlining progress with negotiations should be made
periodic reports to Committee following the conclusion of an agreement indicating the extent to which its terms have been implemented and proposals for enforcement.

More information about planning agreements should be publicly available and that this information should be as full and complete as possible. Concluded agreements should be placed on Part II of the Public Register of planning applications.
When considering resourcing of the planning system in Scotland the executive should consider the need:

to deliver more effective and up to date development plans sooner.
to ensure that adequate and appropriately experienced planning, surveying and legal staff are devoted to complex applications where legal agreements are involved.

The idea of Infrastructure Statements/Annual Infrastructure Review Documents is floated for further consideration.
It is not recommended that the new Bill should incorporate provisions relating to tariffs or optional charges as an alternative to other potential solutions.
The Bill should oblige infrastructure providers to engage in and contribute to the statutory planning process and to respond to consultations on individual planning applications.
The Scottish Executive should consider the findings of the Barker Review in relation to the planning system in Scotland in general and to the new Bill in particular.
The Scottish Executive should consider clarifying the relationship between the planning system and the delivery of affordable housing in the new Planning Bill.

A copy of the report is available from the Scottish Executive here.

Caroline Docherty, Head of Acquisition & Development comments:

The full report, which includes summaries of responses given by key consultees, makes interesting reading, although the research findings may well come as no surprise to many. They certainly mirror the more informal research carried out by Bell & Scott recently, which informed our response to the Planning White Paper. Once again the industry’s concerns over the resource available to planning authorities in terms of appropriately qualified staff, and also the key role that up to date Development Plans can play in the planning process, are highlighted, and the specific recommendations to address these are to be welcomed.

In addition the recommendation that infrastructure providers be obliged to engage in and contribute to the planning process and respond to consultations will come as music to the ears of many. It is acknowledged that Scottish Water in particular “do not appear to appreciate the significance of their not engaging fully in the plan making process and do not fully appreciate the significance of relating their capital expenditure programming to planning objectives.” In the face of such an approach we agree that nothing short of a legal obligation will work, and careful thought will need to be given to the sanctions to be applied in the event of a failure to comply with such an obligation.

However, in relation to Section 75 Agreements, our fear that the proposals aired in the White Paper will lead to no more than a re-stating of the current law (albeit in a clarified form) are not allayed to any significant extent by this report. There is an acknowledgement that the negotiation of planning gain and the Section 75 Agreements that follow, are time consuming and not sufficiently transparent. But it does seem that the opportunity to put forward some significant, but relatively simple ways of addressing these has been lost. For example, to name but two: a move towards standardisation of wording and uniformity of approach in terms of delivery of affordable housing. The industry will need to await the report of the Working Group that is currently considering affordable housing for more detail on that issue.

Saving SDLT

Stamp duty land tax can for the moment still be saved

James Aitken, Property Tax Associate looks at schemes using SPV’s and Unit Trusts to save SDLT in property transactions

The Government clearly does not think that £9 billion pounds from the various stamp taxes is enough. The two Finance Acts since SDLT was introduced in 2003 have contained numerous additional anti-avoidance provisions. Added to this, the Government abolished disadvantaged areas relief for commercial property transactions earlier this year.

There are still two ways regularly used to save stamp duty land tax (SDLT). The use of special purchase company vehicles (SPVs) has been around since stamp duty days. The second, a relative newcomer, involves unit trusts.

Commercial property is increasingly being offered for sale with one of these structures in place. The main reason for this is to make the property easier to sell as a potential purchaser will have less or even no SDLT to pay. The seller may also seek to share in the potential SDLT saving.

Use of SPV’s

The first step is to set up a new SPV and then transfer the property into it. No SDLT is paid on this transfer as it is a transfer to a group company. When the SPV is sold stamp duty at a rate of 0.5% is charged. This is a considerable saving on the top rate of SDLT which is 4%. An extra saving arises if the SPV is sold subject to the company’s debt. The extra saving arises as the 0.5% per cent of stamp duty is only charged on the net-of-debt figure. If the SPV is a non-UK company no stamp duty is paid.

The main issue here is one of timing. If the SPV is sold within three years of the transfer of the property the SDLT relief claimed on the transfer between the group companies has to be repaid. That is one reason why a number of companies place each property in a separate SPV as soon as it is purchased.

The sale of the property from the SPV instead of the shares in the SPV does not affect the SDLT relief claimed on the initial property transfer. There would be no SDLT saving for the purchaser.

Use of unit trusts

Again the first step is to set up a unit trust. The cost of this is much greater than the setting up of a SPV. The unit trust can be a UK entity or based offshore. A favourite offshore destination is Jersey. The property is then transferred to the unit trust. The transfer of the property to the trustees of a unit trust in return for units in the trust is exempt from SDLT provided that the transferor receives only units in a newly created trust. The units can then be sold to the buyer. If the unit trust is a UK entity 0.5% stamp duty is paid on the units. If the unit trust is a non-UK entity no stamp duty is paid.

The future

Given the recent history of SDLT it is likely that the Government will seek to reduce the amount of SDLT lost as a result of the use of SPVs or unit trusts both on and offshore. One option for the Government is to tax the sale of shares in property rich companies or unit trusts at the property rate (i.e. up to 4 %) rather than the shares rate (0.5%). The taxing of property rich companies was in fact outlined in the original SDLT consultation paper. There is no reason why the rules outlined for property rich companies could not be extended to cover unit trusts. Nothing came of this idea at the time. It will be interesting to see if the pre-Budget report, likely to be published sometime in late November, gives any indication at all on resurrecting the idea of taxing property rich companies or even extending it to unit trusts. That said, the Government may decide to give no prior warning. The precedent for this is the ending of disadvantaged areas relief for commercial property transactions. Only a few hours warning was given for this. The same could well happen to the use of SPVs and unit trusts.

Since clarification of the tax rules in the Finance Act 2004, property derivatives have been receiving ever increasing coverage in the press and, following on from REITs and the new SIPPs rules, appear to be the new toy in the box. But what are they? Basically they are financial instruments which enable investment in property without the need to buy and sell the physical property itself. As they are simply contracts between counterparties, property derivatives do not need to follow any rigid structure.

One form of property derivative which is likely to prove popular is a “contract for differences”. For example you may think that a retail property is going to go up in value but have no interest in purchasing it or the owner does not wish to sell it. You can then enter into a property derivative with a counterparty which has a differing view of the likely price movement. This done by contracting with the counterparty as to the index on which the contract will be based, the future price of the property, the frequency of settlement and maturity of the contract. “Total return swaps” are another form of property derivative which are likely to prove popular and involve counterparties simply agreeing to swap their cash and property returns for a fixed period without either party paying cash up front or receiving the physical property.

So what are the advantages? As the investor is not actually buying or selling the physical property, it does not incur costs such as Stamp Duty Land Tax, surveying fees, estate agents fees and lawyers fees etc. The lack of physical delivery also means transactions can be quicker and cheaper. Investors are able to limit their exposure by not taking on the responsibilities of ownership. As investors can speculate on both rises and falls in property prices, they can also profit from gambling on a falling market.

It is still early days and we can not yet be certain if and how quickly the property derivative market will grow but prevailing view certainly seems to be that the market will expand and has the potential to grow very quickly indeed. Consequently, there must be concerns that a growth of the property derivative market will have a detrimental effect on the underlying property market. However, attractive as it sounds, the property derivative market is unlikely to prove to be a panacea. Any negative effect on the underlying property market could dramatically reduce the government’s tax intake and lead to a further change in the tax rules. However quite apart from the Government’s likely reaction to falling revenues at the treasury, investing in property derivatives does not allow any manner of control of the property. Unlike the owner of the physical property, the investor cannot redevelop, improve or manage the property and consequently has less influence over its investment. With derivatives, you check the odds, back your horse, then wait to see if it comes in.