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    • Mr.Jelly
    • By Mr.Jelly 4th Oct 17, 10:46 PM
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    Mr.Jelly
    Overage vs ransom strip when selling
    • #1
    • 4th Oct 17, 10:46 PM
    Overage vs ransom strip when selling 4th Oct 17 at 10:46 PM
    I am selling a quarter acre plot with a bungalow on it that backs onto agricultural land. The farmer would like to put 30 houses on this land which is currently outside the village envelope. The village has no neighborhood plan at present, and there would be local opposition as well as there not being any easy access to the fields. So the possibility of my plot being used to provide an access road to a new development is rather hypothetical. However, I would be irked if the land became a lot more valuable shortly after I had sold it.

    This made me wonder whether some form of overage/covenant or ransom strip at the back of the plot could be used to avoid future regrets without too adversely affecting the sale price or incurring substantial legal expenses. Some online opinions I have read suggest that overage clauses can incur liabilities to extra capital gains tax for the seller and stamp duty for the buyer. On the other hand, setting up a ransom strip at the back of the plot might involve other legal and professional expenses and delays. Does anyone have any relevant experience or advice that could apply to this situation?
Page 1
    • 00ec25
    • By 00ec25 5th Oct 17, 7:49 AM
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    00ec25
    • #2
    • 5th Oct 17, 7:49 AM
    • #2
    • 5th Oct 17, 7:49 AM
    overage can incur either CGT or income tax depending on the exact circumstances

    https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg72852

    a ransom strip would be a sale of land no longer forming part of a garden forming part of your main residence (I assume that is the current status of the 1/4 acre and bungalow?) and so would be sale of land subject to CGT
    • Davesnave
    • By Davesnave 5th Oct 17, 8:05 AM
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    Davesnave
    • #3
    • 5th Oct 17, 8:05 AM
    • #3
    • 5th Oct 17, 8:05 AM
    A ransom strip no matter how narrow, might put some buyers off. After all, how would you maintain it, and would you?

    I live in the country, so I know that a wildlife corridor might have little impact, but if neglect allowed trees to establish that might block my view of that farmland, I'd be less pleased.

    Also, the fact of a ransom strip's existence will make prospective buyers feel that the possibility of a new estate behind them is threat. They would infer that you know something, and of course you do, albeit currently just some neurological activity in a farmer's brain.
    'A society grows great when old men plant trees whose shade they'll never sit in.'
    • Ozzuk
    • By Ozzuk 5th Oct 17, 8:37 AM
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    Ozzuk
    • #4
    • 5th Oct 17, 8:37 AM
    • #4
    • 5th Oct 17, 8:37 AM
    Perhaps consider an uplift cause if the potential is that high, i.e. if land sold for access then a percentage is payable to you.

    Would put a lot of people off though.
    • AdrianC
    • By AdrianC 5th Oct 17, 8:50 AM
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    AdrianC
    • #5
    • 5th Oct 17, 8:50 AM
    • #5
    • 5th Oct 17, 8:50 AM
    Yes, you may have to pay tax on the money you receive from an overage - but that tax is a percentage of the extra money that you receive...

    I'm also with the line of thought that says this is simply going to make the sale harder, because it's going to raise the antennae of potential buyers.

    If you think the farmer's going to develop, then simply approach the farmer and say "Would you like to buy this land?".
    • yorkie3
    • By yorkie3 5th Oct 17, 9:19 AM
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    yorkie3
    • #6
    • 5th Oct 17, 9:19 AM
    • #6
    • 5th Oct 17, 9:19 AM
    Personally, I think you're being greedy. You're trying to have your cake and eat it. Either sell the land at its current value or retain it if you think it will increase in value. You are making no effort in increasing the value of the land yourself so I don't see why you think you're entitled to benefit from any uplift in value. Whenever I look at purchasing land and see ransom strips, uplift clauses or something similar, I just move on as I know it will be more trouble than it is worth.
    • Mr.Jelly
    • By Mr.Jelly 5th Oct 17, 9:42 AM
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    Mr.Jelly
    • #7
    • 5th Oct 17, 9:42 AM
    • #7
    • 5th Oct 17, 9:42 AM
    Thanks for your replies everybody. I should have said this is a property I inherited, not my main residence, hence the possible impact of CGT and SDLT on the actual or estimated value of any overage/uplift.

    I was hoping that if I retained ownership of a 2x50 foot strip at the back, then no disposal of land for that little plot would occur and so tax could only be levied on the larger plot without consideration of the ransom strip.
    • AdrianC
    • By AdrianC 5th Oct 17, 9:45 AM
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    AdrianC
    • #8
    • 5th Oct 17, 9:45 AM
    • #8
    • 5th Oct 17, 9:45 AM
    I was hoping that if I retained ownership of a 2x50 foot strip at the back, then no disposal of land for that little plot would occur and so tax could only be levied on the larger plot without consideration of the ransom strip.
    Originally posted by Mr.Jelly
    Don't forget the legal costs in shifting that to a separate title - and the costs in establishing an extra boundary to delineate it, and then the time to maintain it and ensure it doesn't fall under an adverse possession claim...
    • Mr.Jelly
    • By Mr.Jelly 5th Oct 17, 9:55 AM
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    Mr.Jelly
    • #9
    • 5th Oct 17, 9:55 AM
    • #9
    • 5th Oct 17, 9:55 AM
    Personally, I think you're being greedy. You're trying to have your cake and eat it. Either sell the land at its current value or retain it if you think it will increase in value. You are making no effort in increasing the value of the land yourself so I don't see why you think you're entitled to benefit from any uplift in value. Whenever I look at purchasing land and see ransom strips, uplift clauses or something similar, I just move on as I know it will be more trouble than it is worth.
    Originally posted by yorkie3
    Thanks for that! Wouldn't anyone with a family have a duty to maximize their return on any asset? Until we socialize land ownership and allocate it according to need, this is just what we do in this country.

    I do take your point about putting people off though.
    • 00ec25
    • By 00ec25 5th Oct 17, 10:14 AM
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    00ec25
    Perhaps consider an uplift cause if the potential is that high, i.e. if land sold for access then a percentage is payable to you.

    Would put a lot of people off though.
    Originally posted by Ozzuk
    that is the meaning of the word overage as used in the OP
    • 00ec25
    • By 00ec25 5th Oct 17, 10:20 AM
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    00ec25
    Thanks for your replies everybody. I should have said this is a property I inherited, not my main residence, hence the possible impact of CGT and SDLT on the actual or estimated value of any overage/uplift.

    I was hoping that if I retained ownership of a 2x50 foot strip at the back, then no disposal of land for that little plot would occur and so tax could only be levied on the larger plot without consideration of the ransom strip.
    Originally posted by Mr.Jelly
    only the buyer pays SDLT, not the seller

    when you sell the bungalow and its garden you will incur CGT based on the inheritance/probate value

    if you retain and then sell a ransom strip that too will be subject to CGT as a separate land transaction not linked to the previous sale, bearing in mind the strip itself will obviously not be capable of being developed, so won't attract income tax, but will presumably sell for a large gain based upon its then status compared to its previous status a mere 50ft strip of isolated garden land
    Last edited by 00ec25; 05-10-2017 at 10:22 AM.
    • davidmcn
    • By davidmcn 5th Oct 17, 10:43 AM
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    davidmcn
    Overage isn't likely to be palatable to normal residential buyers (and certainly not to their lenders, assuming you want some form of security over the property). And the ransom strip just highlights the potential issue.

    Surveyors can assign some sort of "hope" value to anticipate future development but depends how theoretical it is at this stage. I am guessing that building the access road would involve demolishing the house? And that any planning consent (never mind actual development) would probably be years away?
    • maisie cat
    • By maisie cat 5th Oct 17, 11:18 AM
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    maisie cat
    Either will put people off, I'm looking at the moment and just spotted a perfect property but with a 15 year overage clause.
    I read somewhere a few years ago where an overage was triggered by the buyer adding a shed to the land, it's just not worth the hassle. a
    Either keep the land as an investment, rent the plot for a couple of years until you get an idea of whether planning will be likely or sell it and get you hands on your inheritance in cash now.
    Remember any sniff of a housing estate behind the plot will make it plummet in value, so the only real option will be to make it part of the development
    • ProDave
    • By ProDave 5th Oct 17, 11:31 AM
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    ProDave
    The overage or uplift clause will be difficult to word. I.e it would be easy to word an overage clause that if they got PP to knock down the house and build 3 in it's place they would have to pay you. but I am not so sure it would be easy to word a clause if they sold a strip as an access road, or even knocked down the house to build the access road.

    I would choose the ransom strip. It only needs to be tiny, 6 inches would do. Make sure you fence it off with a fence each side of the strip, i.e 2 fences back to back. The garden would then reduce by a tiny amount and any buyer would not be bothered.

    Split the land title before you sell the house so it does not delay the sale, and the buyer does not get bothered with the paperwork of the split.

    Think also of access via a neighbour. Could they pass through your land, then take a turn to exit via a neighbours land to avoid the ransom trip? Would you also want a ransom strip between you and a neighbour? (could get "interesting" if it's a semi detached house)
    • moneyistooshorttomention
    • By moneyistooshorttomention 5th Oct 17, 2:09 PM
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    moneyistooshorttomention
    Thanks for that! Wouldn't anyone with a family have a duty to maximize their return on any asset? Until we socialize land ownership and allocate it according to need, this is just what we do in this country.

    .
    Originally posted by Mr.Jelly
    Re-phrased to "Wouldnt anyone have a duty to maximise their return....".

    Maximising either applies to everyone (including those without families) or applies to no-one.

    Just being consistent....
    #MeToo
    • Mr.Jelly
    • By Mr.Jelly 5th Oct 17, 8:33 PM
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    Mr.Jelly
    only the buyer pays SDLT, not the seller
    Originally posted by 00ec25
    True but irrelevant, in as much as the buyer writes the cheque, but in effect any extra surcharge on the buyer would be reflected in a lower sum passed on to the seller.

    If, as I suspect, the overage pushes the taxable amount into a higher SDLT tax band then this could be quite disadvantageous to me too.
    • Mr.Jelly
    • By Mr.Jelly 5th Oct 17, 8:38 PM
    • 13 Posts
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    Mr.Jelly
    Re-phrased to "Wouldnt anyone have a duty to maximise their return....".

    Maximising either applies to everyone (including those without families) or applies to no-one.

    Just being consistent....
    Originally posted by moneyistooshorttomention
    Yawn,.... Get a life mate!
    • 00ec25
    • By 00ec25 5th Oct 17, 9:02 PM
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    00ec25
    True but irrelevant, in as much as the buyer writes the cheque, but in effect any extra surcharge on the buyer would be reflected in a lower sum passed on to the seller.

    If, as I suspect, the overage pushes the taxable amount into a higher SDLT tax band then this could be quite disadvantageous to me too.
    Originally posted by Mr.Jelly
    heh? are you confused how SDLT works?

    the seller does not receive a "lower sum". The seller gets the price they agreed to sell it at. The buyer pays any SDLT due on that amount as a figure over and above the selling price.The SDLT is then paid to HMRC by the buyer. The seller does not pay the tax from the money the seller receives.

    I agree that because of the step change threshold applicable to SDLT there are certain selling prices where buyers will seek to reduce the asking price to below the threshold and thus avoid having to pay extra tax, but those points are relatively narrow and there are only 4 of them.

    take the example of a selling price of 200k....the buyer pays 200k to the seller and over and above that sum also pays (200-125) x 2% = £1,500 SDLT to HMRC. So the buyer spends a total of 201,500 and the seller receives 200k. That is not a "lower sum", the seller agreed to sell it 200k and gets 200k.

    If the seller prices on the basis of the final cost to the buyer is 201,500 and therefore the seller is "only" getting 200k because of the impact of the tax then the item being sold is only worth 200k, not the 201.5 the seller thinks he should have got, and given SDLT applies to both overage or ransom strip purchase prices I fail to see why it is such an issue for you.
    Last edited by 00ec25; 05-10-2017 at 9:05 PM.
    • glasgowdan
    • By glasgowdan 5th Oct 17, 9:22 PM
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    glasgowdan
    As a buyer I'd find this disgusting and wouldn't dream of buying it.

    If someone buys a used car, renovates it and increases its value it's unheard of that the former owner would get any of the profit. Why do some people accept it with property?
    • Mr.Jelly
    • By Mr.Jelly 5th Oct 17, 9:32 PM
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    Mr.Jelly
    heh? are you confused how SDLT works?

    the seller does not receive a "lower sum". The seller gets the price they agreed to sell it at. The buyer pays any SDLT due on that amount as a figure over and above the selling price.The SDLT is then paid to HMRC by the buyer. The seller does not pay the tax from the money the seller receives.

    I agree that because of the step change threshold applicable to SDLT there are certain selling prices where buyers will seek to reduce the asking price to below the threshold and thus avoid having to pay extra tax, but those points are relatively narrow and there are only 4 of them.

    take the example of a selling price of 200k....the buyer pays 200k to the seller and over and above that sum also pays (200-125) x 2% = £1,500 SDLT to HMRC. So the buyer spends a total of 201,500 and the seller receives 200k. That is not a "lower sum", the seller agreed to sell it 200k and gets 200k.

    If the seller prices on the basis of the final cost to the buyer is 201,500 and therefore the seller is "only" getting 200k because of the impact of the tax then the item being sold is only worth 200k, not the 201.5 the seller thinks he should have got, and given SDLT applies to both overage or ransom strip purchase prices I fail to see why it is such an issue for you.
    Originally posted by 00ec25
    Well, if the farmer can realise development land value on the plots for 30 houses as a result of gaining access to the main road through my property, he could be in for a good wedge of notes. More than a million quid perhaps, so perhaps the overage would be of the order of a third of that uplift. If that was added to the sale value in the SDLT assessment, then the liability could be pretty substantial I imagine. Especially as the postulated developer and his money may not show up for several years. The question we have not resolved is what tax liability is created by a potential overage payment and when is it due.
    Last edited by Mr.Jelly; 05-10-2017 at 9:34 PM. Reason: spelling
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