Navigating IHT Concerns in Land Promotion: Hope Value and Some Innovative Solutions for Landowners and Developers

In light of the changes to agricultural property relief and business property relief in the November budget, Inheritance tax (IHT) is an increasingly significant consideration for landowners in England and Wales. In a development context, landowners are becoming wary of the increased 'hope value' that could come with potential planning permissions, which can inflate their estate's IHT liability during the planning process and which they may not be able to afford prior to the land being sold. Such concerns could be causing landowners to hesitate over land deals, impacting housing delivery, though they can be mitigated through an innovative and collaborative approach with promoters and developers. 

One of the key concepts that can affect the valuation of land for IHT purposes is “hope value”, i.e. the additional value attributed to land based on the expectation that it might be granted planning permission in the future. This was exemplified in the case of Foster v Revenue and Customs Commissioners, in which it was held that HMRC were correct to value agricultural land for IHT purposes using a “top-down” approach (assuming residential development value and discounting for risk factors), rather than a “bottom-up” valuation proceeding from the starting point that the land did not benefit from a planning consent. In this case, although the land had no vehicular access, the deceased had entered into a joint venture with a developer to promote the land and the land was identified in the local plan as having the potential to meet development meets beyond the period of the then current local plan. The disparity between the landowner’s “current use” valuation of £128,000 and court’s determination of £590,000 was stark, indicating that even at a relatively early stage of the land promotion process hope value can have a significant impact on IHT liabilities.

Hope value is likely to increase at every stage of a promotion agreement, beginning with entry into the agreement itself, then allocation of the site in the local plan, through to the grant of a planning permission. Given the typical length of promotion and option agreements (sometimes up to 20 years), there is a real risk for many landowners that their estate could face a significant IHT liability before a sale with the benefit of a planning permission is achieved and their share of the uplifted value of the land has been realised. Promoters and developers may therefore consider offering reassurance to landowners through legal solutions, ensuring strategic land transactions remain attractive and viable.

Examples of innovative solutions that could be attractive to landowners in mitigating their IHT exposure include:

1. Low initial option or promotion fees, with subsequent payments tied to planning milestones, aligning land value increases with manageable payments. This approach not only addresses the immediate IHT concerns by providing the landowner with access to funds to cover the IHT due, but also ties the developer's investment to tangible planning advancements. 
2. Choosing an IHT instalment-based payment plan with HMRC, where available. This flexibility can significantly ease the financial pressure on the estate, making land deals more palatable.  
3. IHT insurance, providing a financial buffer for the landowner's estate against IHT liabilities during the term of an option or promotion agreement. If available, the question of who might pay for the insurance (and whether it is reimbursable form sale proceeds) could be a commercial discussion to be had by the parties.  
4. The promoter or developer could offer to fund the landowner’s tax planning advice (and depending on the nature of that advice and the extent of doing so) the cost of implementation. This might allow sensible mitigation of the IHT risk with the cost recovered as a deductible expense at sale.  Such an offer should not be expected in every case and would be very specific to individual circumstances, but may be attractive on a cost/benefit basis if it related specifically to the development site (rather than wider estate matters). 

Developers and housebuilders can play a crucial and collaborative role in dispelling IHT anxieties by leveraging creative legal strategies and financial products. These solutions not only facilitate land deals but also build trust with landowners, fostering a more dynamic and co-operative development landscape.

Landowners should also be proactive in undertaking careful estate planning before entering into a promotion or option agreement to mitigate their IHT and other tax liabilities.

For landowners, promoters and developers, specialist advice on these complex issues and engaging with experienced legal professionals is crucial.