UK landowners face both opportunity and risk when shifting land from agriculture to development. In this article, Naomi Stewart, Head of Tax at Shaw Gibbs and Partner at Martin and Company, with contributions from Tom Sater of RO Energy and Paul Sams of Dutton Gregory, explores how early planning can prevent costly tax and legal pitfalls.
For UK landowners, the shift from agriculture to development, whether for residential projects or renewables, offers the promise of profit. But without early tax planning, clear legal structure and realistic timelines, that opportunity can rapidly give way to complexity, delay and inefficiency.
With Defra reporting that 90% of English farms are family-run, land development is rarely just a business decision. It often involves multi-generational ownership and deep emotional ties with the chance of unresolved title issues too.
Naomi Stewart, Head of Tax at Shaw Gibbs and Partner at Martin and Company (part of the Shaw Gibbs Group), is joined by Tom Sater from RO Energy and Paul Sams of Dutton Gregory to unpack the tax and legal nuances practitioners mut navigate.
Checking ownership of land may seem like an obvious place to start, but establishing clear land ownership is not always straightforward.
“Land that’s been passed down through generations can have complicated title issues, especially where probate is incomplete or old agreements were never formalised,” explains Paul Sams, Managing Partner at Dutton Gregory.
“Landowners must conduct thorough due diligence before entering into discussions around selling their land, which can save a lot of time and frustration down the line.”
Verbal tenancies between neighbours or family members can be particularly problematic. Vacant possession is essential for most developers, and unresolved tenancies can stall a deal indefinitely. Settling these matters at the outset is crucial.
Where landowners combine forces, often necessary to meet access or infrastructure requirements, the commercial logic is strong, but so are the tax implications.
Equalisation agreements aim to fairly divide proceeds, but “payments shared between landowners can attract double taxation, with no relief for the landowner making the payment,” warns Stewart.
A more tax-efficient structure is the land pool trust.
“This simplifies how profits are distributed and provides greater certainty for developers, removing the risk of one landowner pulling out,” Stewart explains.
However, it can also mean the loss of certain reliefs and an increased administrative burden, particularly if the trust needs to be unwound for any reason.
Alternative mechanisms such as covenants or cross-option agreements offer different balances of flexibility, fairness and tax risk. The key is to seek expert advice early to weigh legal clarity against commercial goals and tax efficiency.
Whether land is sold outright or leased for renewables, landowners must assess the implications for Inheritance Tax reliefs such as Agricultural Property Relief (APR) and Business Property Relief (BPR).
“Leasing farmland to a third party, such as a solar or renewables company, can have significant implications,” says Stewart. While APR and BPR are being reduced from 100% to 50%, they remain important tools for succession planning.
Under long-term leases, land can cease to be treated as agricultural or trading property. “That shift means the land is very unlikely to qualify for APR,” Stewart warns.
“The implications for BPR are even broader.” Relief depends on the whole business being “wholly or mainly” trading. If investment activity from leases tips the balance, BPR may be lost not only on the leased land but across the entire estate.
Because HMRC typically looks at several years of business activity, even temporary changes can have long-lasting effects.
One solution, Stewart notes, is to carve out the investment element, for example, by placing leased land into trust, protecting the trading business’s reliefs while reducing inheritance tax exposure.
Despite the financial potential, renewables projects have uncertain timelines. “We’re now looking at connection dates in the 2030s or even 2040s,” says Tom Sater, Head of RO Energy. “Much of this delay is tied to the available capacity with the National Grid.”
Sater recommends that landowners be engaged to secure initial offers from National Grid, which is subsequently followed by more detailed agreements.
“Even these initial steps can be enough to trigger movement with National Grid,” he continues. “With such long timelines, starting early is essential.”
Operational logistics also matter. “Renewables projects, including solar and wind farms, require maintenance which in turn requires access,” Sater notes. Without early planning, access arrangements can disrupt ongoing agricultural operations.
Perhaps the most critical distinction for landowners is whether a development transaction falls under Capital Gains Tax (CGT) or Income Tax. CGT is typically more favourable, but not guaranteed.
“If HMRC considers that you acquired or prepared the land with a clear intent to make a profit from its development, then the transaction may be taxed as income,” Stewart explains.
This is particularly relevant under the ‘transactions in land’ rules, which rely heavily on intention. Buying land with development in mind, even if held for years, can still result in an Income Tax charge if profits are realised later.
A common pitfall, Stewart cautions, is acquiring land out of a company for future development. “If HMRC believes the original intention was profit through development, it could challenge the transaction and apply income tax on any eventual sale.”
A clear paper trail, early legal input and careful structuring can protect landowners from unintended liabilities.
Landowners often find VAT more confusing than CGT or IHT, though the rules are relatively straightforward. Bare land sales are exempt from VAT by default. However, an “option to tax” can be applied to commercial land, allowing VAT recovery on associated costs.
“The option to tax is binding for a minimum of 20 years and can’t easily be revoked,” Stewart stresses. “If the land is ultimately sold to a party that cannot reclaim VAT, the additional 20% cost can significantly reduce the land’s market value.”
Where the buyer is a housebuilder able to reclaim VAT, opting to tax can be advantageous. Timing and clarity of intention are key, and any decision should be made with a clear understanding of the end use.
Land development is rarely straightforward. From clarifying ownership and navigating reliefs to managing lease structures and planning for tax liabilities, every decision has implications.
For tax and accountancy professionals, the lesson is clear: integrated, multidisciplinary advice is essential. No single element, be it VAT, CGT or BPR, exists in isolation.
“By understanding how legal structure, commercial objectives and tax consequences all fit together,” Stewart concludes, “practitioners can help landowners turn opportunity into lasting, tax-efficient value, preserving not just profit, but also the legacy of their land for generations to come.”
