On 3 March 2021 the Chancellor is due to deliver his next Budget. One widely feared change on the horizon is an increase in the rate of capital gains tax (CGT) – particularly following the Office of Tax Simplification (OTS) report published in November 2020. Among other suggestions, the OTS report suggested that the rates of CGT should be aligned with those of income tax which would generally mean a significant increase in the amount of tax payable; the top rate of income tax in the UK being 45% compared to the usual top rate of CGT of 20% (or 28% for gains on the disposal of residential property and carried interest).
Time of disposal?
For any ongoing transactions, landowners are likely to be putting pressure on housebuilders to pick up the pace so that they can dispose of their asset before 3 March and bank gains prior to a rate rise. Of course, no one yet knows whether the change will come to pass and both parties should think carefully before rushing into a transaction based only on speculation about changes of law.
But when does a disposal take place for CGT purposes? Where the asset is being disposed of under a contract (as will usually be the case for land), not the date of completion as some might expect. Where an asset is sold under an unconditional contract, the date of disposal is the date on which that contract is executed.
If there is to be a condition under the contract (the most usual being the housebuilder securing detailed planning permission for its development) then care needs to be taken to determine whether this does make the contract conditional or whether it is simply a condition to completion. In some circumstances a contract might be unconditional for this purpose even if there is a condition to be satisfied before completion can take place. Specialist advice should be sought as this is a complex question.
Where an asset is sold under a conditional contract then the disposal occurs only when the condition is satisfied.
A chilling effect
Assuming for a moment that the rates do rise as anticipated, this could have unexpected consequences for the housing market. Landowners disposing of investment property could in the future be subject to much higher amounts of CGT on their chargeable gains than currently, thereby significantly reducing their returns. This may mean that some landowners may become more reluctant to dispose of their property interests, or will demand far higher consideration for doing so, with knock-on consequences for market activity.
A further key point for housebuilders to note relates to the impact on existing option and promotion agreements with landowners, particularly those containing “freezer” clauses and those where the purchase price is calculated by reference to the market value of the land. Freezer clauses generally allow a landowner (or a promoter or developer, depending on the agreement in question) to delay the sale of the land where the purchase price for the land falls below a minimum price due to a fall in the market. The clause has the effect of “freezing” the option period in which the housebuilder company can purchase the land until the purchase price or potential development value exceeds the minimum set out in the agreement.
If prices fall (or the clause is drafted by reference to the net amount retained by the landowner), then the buyer’s option to purchase may be frozen and this could be relevant to a number of transactions. Housebuilders may find that option periods are similarly frozen in relation to more than one agreement at the same time, which could have significant ramifications for housebuilders’ pipeline and in due course new housing supply.
In short, housebuilders should be aware of the potential challenges that a rate rise may bring (both before and after the change). Any changes could have a significant impact on future property developments, and businesses should consider how they can protect themselves moving forward, while keeping up to date with any announcements made in March.