What is equalisation?
Neighbours who own land with development potential often collaborate with each other (usually also engaging the services of a specialist land promoter) to secure planning permission over the combined area with a view to dividing the sale proceeds between them.
The principle of dividing up the sale proceeds so that each landowner receives a sum which represents a fair and reasonable proportion of the value of the whole of the development area is known as “equalisation”. There are various approaches to and mechanisms to achieve equalisation and landowners need to consider early on which one is right for them as each one has pros and cons. The appropriate mechanism should be reflected in a collaboration agreement which prescribes the rules of engagement between the various landowners.
How can it be achieved?
Equalisation can be achieved in a number of different ways. There are many factors which determine the most appropriate solution including, amongst other things, the location, nature and value of the various landholdings, the size of the overall development area and the extent of the infrastructure requirements:
- Through the masterplan = ensuring that land uses are evenly distributed across the whole development area so that each landowner receives sale proceeds for their individual land holding proportionate to the amount of land that they contributed for development. This can be very difficult to achieve in practice where, for example, significant infrastructure is required or a planning agreement requires non or less valuable land uses such as affordable housing or public open space etc.
- By landowners sharing all net sale proceeds = this sounds straightforward and can work well in certain scenarios but it can in practice give rise to double taxation if not properly structured. The double tax liability arises where several landowners want to sell their combined land holding in phases and apportion all net sale proceeds between them on an equalised basis with each landowner being entitled to a share on each phase sale whether or not they actually own land within that particular phase. The actual owner of the phase being sold will be liable to pay CGT on the whole sale proceeds including the proportion which will be shared with the other landowners. In turn the other landowners will be liable to pay CGT on the proportion of proceeds which they actually receive. Hence, that proportion is taxed twice.
- Using a land pool trust = this is one way of avoiding the potential double taxation issue and it also has other potential benefits (beyond the scope of this note). It requires the various landowners to create a trust to which they all transfer their respective landholdings. The transfers into the trust will not trigger a CGT liability provided that the values of the respective landholdings are, at the time of pooling, the same on a pro rata acreage basis. If one landholding is more valuable than others (on a pro rate acreage basis) then the transfer into trust by that landowner may be treated as a chargeable disposal giving rise to a CGT liability. Early valuation advice is therefore essential. Land pool trusts do have some drawbacks (beyond the scope of this note) and will obviously have time and professional cost implications.
- Land transfers and/ or balancing payments = rather than sharing sale proceeds equalisation may be achieved via compensatory land transfers and/ or balancing payments between the various landowners to ensure that each landowner receives a fair and reasonable proportion of the value of the whole of the development area. This is not a simple solution as determining the amount of any balancing payment (and how it might be secured) and /or the location of land to be transferred can get very complicated. As with a land pool trust, this method also has time and professional cost implications.
Conclusion
It is crucial that landowners wishing to collaborate should sign up early to a formal collaboration agreement and that agreement should clearly prescribe how the parties will actually collaborate with each other and how they will achieve equalisation. Landowners should be aware that if their chosen equalisation method is to share all net sale proceeds between them, that the transaction needs to be properly structured to avoid unfortunate tax implications such as a potential double charge to CGT. Specialist legal and tax advice should be sought at the earliest stage.
