Real Estate Blog: Tax Freezer Clauses Explained

Welcome to our first Real Estate blog for 2023, where we will be demystifying the topics around tax freezer clauses.

What is a tax freezer clause?

Tax freezer clauses (also known as tax suspension clauses) are mainly used in land promotion and option agreements to give the landowner protection against future rises in capital gains tax (CGT); the current headline rate of CGT is 20% for non-residential property and land which compared to the historical average is fairly low.

What is the trigger of freezer tax?

The tax freezer will come into operation if the CGT (or another similar replacement tax) on the proceeds of sale exceed a certain limit (for example, 50%). If this threshold is met, the landowner will usually need to serve written notice on the developer within a certain period of time after the price of the property has been agreed. This notice will then “freeze” or suspend the contract for the “tax suspension period”.The landowner is often required to provide evidence from its accountant of how the tax has been calculated. Landowners should therefore ensure that their tax advisor is aware of any time limits for serving the notice contained in the contract.

How long is the contract suspended for?

This is usually a matter of negotiation, but a maximum tax suspension period of 2 to 3 years is the norm. The tax suspension period can also be brought to an end sooner in the following circumstances:

• if the tax rate comes down or if a reasonable alternative tax structuring arrangement can be found to bring the headline tax rate down, or
• if the developer decides to pay extra for the land to cancel out the effect of the tax rise
• one year before the planning permission is due to expire – this is to allow time for the land to be sold and the planning permission to be implemented (unless the developer has the ability to take steps to preserve the planning permission – see below).

The landowner can also usually withdraw its tax suspension notice and decide to proceed with a sale at any time.

What happens during the tax suspension? 

The effect of the freezer is that the landowner cannot be forced to sell while the tax suspension period is in operation. The parties may during this period also consider alternative structuring arrangements as explained above.

Any time limits in the contract (such as time limits to exercise an option, or market the property), will be extended so that there is still time at the end of the tax suspension period to remarket the property (if being sold) or revalue the property and exercise the option over it (if the developer has an option). The extensions to any time limits should be carefully considered to allow sufficient time for the developer to go through all the relevant steps without time running out.

The parties should also consider whether the developer/promoter should have an ability to implement a planning permission and prevent it from running out during the tax suspension period (known as “planning preservation steps”). This is a complicated area, as taking these steps could trigger the requirement to pay planning contributions or Community Infrastructure Levy.

What happens at the end of the tax suspension?

Ultimately after the end of the tax suspension period, the landowner will be obliged to proceed with the sale, even if there has been no change in the CGT rates.  The aim of the clause is to provide a balance between the developer, who has often invested large sums in getting the planning permission for the land and therefore will want some comfort that it can recoup its investment, and the landowner, by allowing it some time to restructure its affairs or allow for the government to change its mind and bring the tax rates back down.

Detailed legal advice should be sought on any tax freezer provisions as there are many traps for the unwary. This blog post is intended to be an overview of these provisions and is not a substitute for taking detailed legal advice on a particular transaction.