What is land pooling, and when is it used?

Site assembly for a land development project to build housing and/or commercial buildings aims to bring the various separately owned pieces of land together to create a viable development project. Using land pooling, the various separately owned parcels of land are transferred into a trust so that the pieces of land can be developed in a coherent and profitable way. Equalisation agreements can create double tax charges, and so it is common to use a land pooling trust arrangement under which the landowners all hold for each other in proportion to the value of the land they put in.

What are the tax issues arising on land pooling?

Remarkably, there is no cast iron treatment of land pooling for SDLT and CGT purposes, and the tax treatment relies on HMRC practice and case law, which is as follows. Professional legal advice is, therefore, a sensible precaution.

Stamp duty and land pooling

For SDLT, the partition or division of joint interests in a single property involves an exchange of interests because each joint owner gives up his part interest in the property in return for the other joint owner giving up his part interest in the property so that they each walk away with their own wholly owned part of the property. Without any special statutory provision, a partition would be subject to the SDLT rules on exchanges under FA 2003 Schedule 4 para 5. Under these rules there would be an acquisition by each joint owner and the SDLT charge would be on (a) the market value of what was acquired or (b) if greater, the chargeable consideration given. This applies where the interests being exchanged include a “major interest” in land defined as a freehold or a leasehold interest. Where there is no “major interest” then the SDLT charge is only on any separate consideration passing.

Tax exemption for land pooling?

However, FA 2003 Schedule 4 para 6 was intended to take partitions out of the exchange rules and leave an SDLT charge only on any separate chargeable consideration passing, such as equality money. Paragraph 6 provides that “In the case of a land transaction giving effect to a partition or division of a chargeable interest to which persons are jointly entitled, the share of the interest held by the purchaser immediately before the partition or division does not count as chargeable consideration”. This provision can apply to the division of a pool of land interests where jointly owned properties are separately allocated to individual participants in the pool. 

It is apparent that the effect of para 6 is that the value of the interest held by each party before the partition will not be regarded as chargeable consideration given by either party. It might then be thought that an SDLT charge would be on the market value of the shares in the acquired land. However, it is the intention of the legislation that para 6 be read as excluding any charge on partitions except to the extent of any separate chargeable consideration passing.

This was the position prior to the amendment to the exchange rules by FA 2011 which added the reference to chargeable consideration given. While it is doubtful that HMRC considered the effect of the partition exclusion in para 6 when they amended the exchange rules, it seems that no change in the availability of the exclusion for partitions was intended. Accordingly, it seems that the correct SDLT treatment of partitions of land in a land pool is to exclude them from the exchange rules by using a purposive approach. 

HMRC practice and land pools

This approach seems to be approved and accepted by HMRC, as evidenced by SDLTM 04030 and the example at SDLTM 04030a. Accordingly, on the partition of a single property, only any separate consideration will count for SDLT.

Where there is a pool of separate properties in joint ownership, some of which are being separately allocated to individual owners of the pool, then based on this example, this is essentially an exchange of interests and the exclusion in para 6 might not apply.

However, in my experience, it seems that HMRC is prepared to regard such separate allocations of land in the pool as a “partition” so that the only charge to SDLT would be on any separate consideration passing, such as equality money. This is supported by the wording of SDLTM04030, which refers to two or more persons being jointly entitled to land, including more than one chargeable interest.

Where HMRC are willing to regard the allocation of properties out of a pool of properties as a partition or division for SDLT purposes and also to treat the wording of the partition exclusion as taking the allocations out of the exchange rules, then SDLT would arise only on any separate chargeable consideration passing. 

Debt and land pooling

This could be deemed to be the case if there was any debt secured on the properties. Typically, debt will be secured on all the properties in the pool, and when the partition occurs, the joint owners will each be released from the debt obligations pertaining to the properties in which they will be disposing of interest. Indeed, there may be a refinancing or some other change in the nature of their debt obligations. This should lead to deemed chargeable consideration for SDLT purposes under FA 2003 Schedule 4 para 8. However, I have obtained written assurances from HMRC that in certain cases, a charge will not be regarded as arising. Careful planning to prevent deemed chargeable consideration arising should, however, be considered where debt is to be released in case HMRC later take the view that chargeable consideration did arise.

Capital gains tax and land pooling

It is understood that HMRC Stamp Taxes’ current policy generally in relation to land pooling is to follow the approach for capital gains tax arising out of the judgments in Booth v Ellard [1980] 1 WLR 1443 and Jenkins v Brown [1989] STC 577.

Essentially, this approach is to treat the persons contributing land into a pool as not transferring their individual beneficial interest in what they contribute to any other members of the pool where the members of the pool are at all material times jointly and absolutely entitled as against the trustees of the pool to the land vested in the trustees. Transfers to the pool (and also from the pool) fall to be ignored unless there are alterations in the respective beneficial shares of the contributors to the pool. On this basis, HMRC Stamp Taxes generally do not see an SDLT charge arising on contributions to, and extractions from a land pool involving the contributors.

Be Wary 

Taxpayers should be wary of this treatment, however, because it seems to be based on an implicit assumption that the land pool is akin to a bare trust. Where the terms of the agreement or trust document governing the land pool provide for variations in beneficial shares or the exchange of beneficial interests as they often will in developer land pools, then this ‘Jenkins v Brown‘ benign approach may not be appropriate for SDLT and tax on any relative gains may strictly speaking be chargeable. Land pooling arrangements should therefore be carefully considered and the clients advised of the risks should HMRC review them and take issue with the “Jenkins v Brown” approach.