Are you buying a
property for SSAS,
SIPP or other
pension vehicle?

If so you will need to be
aware of how contaminated
land and asbestos can affect
your property investment.

Click here to download
pdf fact sheets

What's It All About?

When?

What Does It Do?

If Land Is Contaminated What Next?

What Powers Do The Local Authority And / Or
The Environment Agency Have?

Who Will It Affect?

Why Trustees?

What About Lessees?

What About Europe?

Does Environmental Risk Have To Be Capitalised?

Can I Ignore This?

If You Area A UK Tax Paying Company
But Not A Polluter?

What's It All About?

Local Authorities are under a DUTY to inspect their areas to determine whether significant harm is or might possibly be caused or pollution of controlled water is being or is likely to be caused. In terms of harm this affects: Human beings resulting in death, disease, serious injury, mutation etc; Ecological systems which results in irreversible or adverse damage to the functioning of an ecological system; Agriculture including diminution of yield or other substantial loss in value resulting from death, disease or physical damage and; Property which includes structural failure, substantial damage or substantial interference with any associated property right in whole or part.

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When?

Now. Local Authorities have begun publishing their strategies. Remediation notices are being served.

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What Does It Do?

The new regime imposes joint and several strict and retroactive liability.

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If Land Is Contaminated What Next?

After a formal consultation exercise the Local Authority are under a DUTY to serve a Remediation Notice. But if the site affects controlled waters the Environment Agency may serve an Anti-Pollution Works Notice without formal consultation and appeal. The powers under the Water Resources Act became active with effect from April 1999.

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What Powers Do The Local Authority And / Or
The Environment Agency Have?

These are analogous to those of the VAT Inspector! They can carry out any works to prevent pollution at the expense of the 'appropriate person', and they are under a DUTY to recover their costs.

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Who Will It Affect?

Whether you represent a pension fund or you own your own home the liability will impact accordingly. No class of organisation or individual is exempt, unless you are a mortgagee not in possession. Even charities and those who act as trustees will fall under the gaze of the legislation.

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Why Trustees?

The Act defines an owner as being:

"In relation to any land in England and Wales, meant a person (other than a mortgagee not in possession) who, whether in his own right or as trustee for any other person, is entitled to receive the rack rent of the land of the land, or whether the land is not let at a rack rent, would be so entitled if it were so let". Section 78A(9)

Therefore a land owning body acting as a trustee is a potentially deep pocket for the clean up of the land. The Pensions Acts, Charities Act and the Law of trusteeship collide.

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What About Lessees?

If a Remediation Notice is served by the Local Authority they are under a DUTY to reflect any agreements struck between the landlord and the tenant. Most leases are highly defective where the land has not been considered as part of a schedule of condition or dilapidations. Furthermore, tenants may find themselves having to comply with statutory notices from the Local Authority or the Environment Agency under the terms of their leases. This will mean that the tenant may have to comply with a Remediation Notice or Anti-Pollution Works Notice even though the landlord or owner of the site may be liable.

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What About Europe?

Although the EU's strict liability regime has yet to be published the new directive 96/61/EC the 'IPPC Directive' which came into force on 31st October 1999 will requires the clean up standard to be far more stringent than required under Part IIA of the Environmental Protection Act 1990.

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Does Environmental Risk Have To Be Capitalised?

YES. Financial Reporting Standard 12 published by the Accounting Standards Board requires this to be valued and reflected as a provision on the accounts. This is now mandatory.

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Can I Ignore This?

If you're a surveyor the RICS position is that:-

'Whatever the particular service the Chartered Surveyor is providing and for whomsoever he or she is acting , that service will be incomplete or inappropriate if it were to ignore any contamination implications for the property or the users of it'

'Contamination and its Implications for Chartered Surveyors' March 2000


If you're a solicitor:-

The Law Society issued a 'Warning Card' to all solicitors in June 2001 on contaminated land matters. The advice contained on the Card is not intended to be a professional requirement for solicitors but in every transaction whether residential or commercial, the solicitor 'must consider whether contamination is an issue'. 'In purchases, mortgages and leases, solicitors should' :-

· Advise the client of potential liabilities
associated with contaminated land.
· Make specific enquiries of the seller.
· Make enquires of statutory and
regulatory bodies.
· Undertake independent site history
investigation e.g. obtaining site report
from a commercial company.


In the case of commercial transaction :-

· Advise independent full site investigation.
· Consider the use of contractual
protections and the use of exclusion
tests.


If unresolved problems occur, the solicitor should consider:-

· Advising withdrawal and noting advice.
· Advising insurance (increasingly obtainable
for costs of remediation of undetected
contamination and any shortfall in value
because of undisclosed problems).


Within specific transactions, solicitors are also to consider any unusual issues within leases particularly repair and statutory compliance clauses which transfer remediation liability to the tenants and advise accordingly. Mortgages are also affected because the lender needs to be aware if enquires reveal potential for or existence of contamination and further instructions obtained. Naturally there are also implications for share sales and asset purchases.

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If You Are A UK Tax Paying
Company But Not A Polluter?

1 Main features
A new tax relief for the remediation of contaminated land was introduced in the 2001 Budget. Where the rules are satisfied, expenditure incurred after 10 May 2001 on remediation receives preferential treatment for tax purposes.

There was initial concern that the relief would not apply to property developers. However, it has now been confirmed that developers can obtain this relief, as well as those holding land either as an investment or for the purposes of their own trade.

The two main consequences are:

An extra 50% is added to the expenditure for the purposes of the tax deduction. A company spending £100,000 on cleaning up land is treated for tax purposes as if it had spent £150,000. Put another way, if it is subject to corporation tax at the full rate of 30%, it effectively gets relief for remediation work at a rate of 45%.

Where the expenditure would normally be on capital account, for example in the case of a property investor, or a trader using the land for its own premises, then relief for the clean-up cost is available as it is incurred. (Normally such expenditure would only be allowable when the property is sold, perhaps many years hence.) In addition, the 50% "bonus" applies here also.

As with most tax reliefs, there are many rules, traps and opportunities. The following is a summary of the main rules. Specific advice should be taken for each situation.

2 Summary of rules

2.1	The relief is only available to companies: not individuals, partnerships or trusts.
2.2	The company must acquire the land in a contaminated state. It is important that the company obtains an interest in the land (which may be freehold, leasehold, a license or an option). Expenditure prior to acquisition can qualify provided that acquisition follows.
2.3	The expenditure that qualifies is broadly the extra cost, as compared with the cost if there had been no contamination. Ordinary site preparation expenditure does not qualify, but assessment costs can qualify.
2.4	It is not necessary to remove the polluting material. Treatment on site can qualify.
2.5	Where remediation work is carried out in-house, relief is limited to employee and material costs. There are detailed rules for what may be included in employee costs, in terms of salaries, national insurance contributions, and pension contributions. The relief covers all or part of the cost of employees and directors who are directly engaged in remediation work for at least 20% of their time. The cost of administrative and secretarial staff cannot be claimed.
2.6	Where remediation work is sub-contracted, the position is simpler and more generous: the full cost of paying the sub-contractor for remediation work can be claimed, without reference to the actual employee or material costs. This means that, in effect, the sub-contractor's administrative overheads, haulage and other costs, and profit margin all qualify for relief.
2.7	The above only applies however where the sub-contractor is independent. There are further rules covering a sub-contractor within the same group, broadly along the lines of in-house work.
2.8	Relief is restricted where the cost is offset by grants or subsidies, or met by other persons. This may be an issue where a payment is made under warranties or indemnities.
2.9	It is essential that the company that acquires the property does not add to the contamination, either by action or inaction. If it does, it could be disqualified. This is potentially a harsh rule, as even a brief delay in dealing with a continuing cause of contamination could mean that all relief is lost. It is therefore important to act quickly to prevent the condition worsening.
2.10	The rules also preclude relief if the contamination took place while the land was in the hands of a connected party. This can mean that it is inadvisable to buy the shares of the company which holds the land, even if the contamination took place long ago: it may be better just to buy the land. There are of course many other tax, legal and commercial issues to consider on an acquisition. Where it is commercially necessary to buy the shares, planning techniques may be available to ensure that the relief is not lost.
2.11	The timing of relief may be when the expenditure is incurred, or (particularly in the case of a developer) when the cost is deducted in the accounts. An investment company may obtain relief more quickly than a developer.
2.12	Where a company cannot make use of the relief, because it has excess tax losses, then it can instead apply to the Revenue for a cash payment of 24% of the qualifying expenditure. This compares to an effective 45% tax relief for a company subject to the full rate of corporation tax. In most cases it will be better to carry forward tax losses and get the eventual benefit at 45%; but 24% in cash may be attractive where there are cash flow concerns.
2.13	There are special rules for life assurance companies, and anti-avoidance provisions.
2.14	The corporation tax relief should be distinguished from the landfill tax exemption for contaminated materials. They will often both apply in the same situations, but have different sets of rules.

3 Key definitions

3.1	Contamination is defined widely. It is necessary to identify "substances" in, on or under the land, as a result of which "harm" is being caused or there is a possibility of harm being caused; or pollution of controlled waters is being, or is likely to be, caused. Nuclear sites are however excluded.
3.2	Substance means any natural or artificial substance, whether in solid or liquid form or in the form of a gas or vapour.
3.3	Harm means harm to the health of living organisms, interference with the ecological systems of which any living organisms form part, offence to the senses of human beings, or damage to property.
3.4	Pollution of controlled waters means the entry into controlled waters of any poisonous, noxious or polluting matter or any solid waste matter.
3.5	Land includes the buildings on the land (so for example the removal of asbestos within buildings would qualify).
There remain some grey areas, for example contamination by noxious plants such as knotweed, or by insects such as termites. Generally however, the definitions will cover most types of contamination.

4 Observations