Combination Transactions: What a Landowner Needs to Know
In a combination transaction the landowner receives no money, only a promise of apartments that have not yet been built. That is what makes it attractive, and it is also what makes it risky. This guide covers the types of transaction, how they are taxed, and the securities without which one should not enter into them.
What a combination transaction is
A combination transaction is an exchange transaction in land. The landowner sells the developer part of his rights in the land and receives in return not money but building services: the developer builds on the land and transfers to the owner a number of housing units fixed in advance.
The attraction is clear on both sides. The developer obtains land to build on without laying out capital to buy it, and the owner converts unused land into built assets without investing in construction. But the owner consideration is future and contingent on performance, and that is where every risk in the transaction begins.
Partial sale against full sale
This distinction is not a matter of words. It determines the tax liability and the structure of the whole transaction.
- Partial sale. The owner sells the developer only part of the land and remains the owner of the rest. The developer builds on both parts, and hands the owner the apartments built on the part that stayed in his ownership.
- Full sale. The owner sells all of the land and receives built apartments in return.
The distinction was drawn in CA 487/77 Director of Land Appreciation Tax v. Ahim Barkai Ltd., and it is what dictates the sale value for capital gains tax.
In a partial sale the consideration is the value of the building services the owner receives. In a full sale the consideration is the value of the whole of the land.
The gap between those two outcomes is substantial, which is why the drafting determines the tax. An agreement that does not clearly separate the part sold from the part retained can be classified as a full sale and carry a far higher liability than the parties planned for.
Net combination
In a net combination the parties agree in advance on the consideration reaching the owner in clean terms, meaning that all payments and taxes arising on the transaction fall on the developer. The owner has more certainty, and in exchange his share is smaller.
In a transaction that is not net, the owner bears the taxes and expenses that fall on him. His share is larger, but he is exposed to changes in costs and assessments. Choosing between the two is an economic question as much as a legal one, and it calls for a calculation before signature rather than after.
How it is taxed
A combination transaction creates liabilities on several fronts at once:
| Tax | Who bears it | Basis |
|---|---|---|
| Capital gains tax | The landowner | The gain on the part sold, on the sale value as the transaction is classified |
| Purchase tax | The developer | The value of the land acquired |
| VAT | Depends on the structure | The building services, and sometimes the sale of the land as well |
| Betterment levy | The landowner | The rise in land value from a betterment plan, on realisation |
A separate question is whether the owner is entitled to an exemption from capital gains tax on the apartments he will receive, and when. It is worth establishing before signature, because it affects the split the parties will agree.
The risks and the securities
The landowner central risk is simple: he transfers an existing asset and receives a future undertaking. If the developer runs into difficulty, the land is no longer wholly his and the apartments are not yet built.
The usual securities:
- A performance guarantee securing completion of the building on time and to the agreed standard.
- A statutory sale guarantee for the consideration apartments, in the form used in bank financed projects.
- A caveat in the owner favour over the part he retained and over the apartments he is to receive.
- A release letter from the financing bank, taking the consideration apartments out of the general charge.
- A milestone mechanism: rights transferred to the developer in stages against actual progress, rather than all at the outset.
- Agreed damages for late delivery and for non completion, alongside a defined right to cancel.
What the lawyer checks
- The state of the rights in the land: the registry extract, charges, notes, and the rights of co-owners or heirs.
- The developer standing: previous projects, bank financing, and legal position.
- The planning position: what may be built today, what needs a new plan, and what happens if the plan is not approved.
- Classification of the transaction and drafting it as a partial or a full sale, in line with the intended tax outcome.
- Definition of the consideration: which apartments, on which floor, of what area, and to what specification. Consideration that is not defined tightly enough is a source of dispute at handover.
- Timetable and securities, and what happens in every scenario of delay, stoppage or insolvency.
A combination transaction runs for years, and over that time prices change, plans change and sometimes the parties themselves change. The agreement is the only thing that stays fixed, so the quality of the drafting is most of the protection.
Before you sign, talk to us. Our office drafts the agreement for you, conducts the negotiation and represents you through to completion of registration. Our real estate department has accompanied transactions for over 15 years, alongside an architect, a surveyor and a property valuer. Call 02-5953322, send a WhatsApp message to 050-4411343 or leave your details in the form below, and we will get back to you as soon as possible.
What people ask most often
What is the practical difference between a partial and a full sale?
What happens if the developer collapses mid project?
Is the landowner exempt from capital gains tax on the consideration apartments?
What is a net combination and what should be watched in one?
How long does a combination transaction run?
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Considering a combination transaction on your land
A combination transaction stands on its agreement. We draft it for you and represent you opposite the developer, the authorities and the tax authorities. Tell us about the land and the offer you received, and we will accompany you from the negotiation stage.