IHT and Overage: The Inheritance Tax Trap When You Sell Land with a Clawback Clause

Planning permission overage (uplift on development value)

The most common type: the seller retains a right to receive a percentage (typically 20–50%) of the increase in the land's value if planning permission is granted within a specified period (often 10–25 years). The payment is triggered when planning consent is obtained and/or the land is sold to a developer. This is a contingent right — the overage only arises if planning is granted. For IHT: the overage right is an asset valued at what a willing buyer would pay for the right at the date of death — essentially a probability-weighted discounted present value of the expected overage receipt.

IHT valuation: The valuation requires: (1) an assessment of the probability of planning permission being granted within the remaining overage period; (2) an estimate of the land value uplift if permission is granted; (3) the overage percentage payable to the seller; (4) discounting to present value for the expected time before receipt. Professional valuation from a specialist property valuer is essential — HMRC will scrutinise overage valuations, particularly where the overage right has a long duration or the probability of planning is uncertain.

Development completion overage (instalments on development progress)

Some overage provisions entitle the seller to payments as specific development milestones are reached — for example, a payment per completed residential unit when the developer builds and sells houses on the land. These instalments may extend over many years as the development progresses. At any given time, the seller's estate includes the right to receive future instalments (those not yet triggered). The IHT value is the present value of expected future instalments.

IHT valuation: Valuation requires: (1) the expected number of units to be completed and timing of each tranche; (2) the expected price per unit at each completion; (3) the seller's percentage entitlement; (4) discounting for time and risk (developer default, planning reversal, market changes). If the development has already started and there is a track record, valuation is more straightforward — HMRC will accept updated projections from a RICS-qualified valuer.

Agricultural clawback on change of use

Farmland is sometimes sold with a clawback provision — the buyer must pay additional consideration if planning permission is obtained for non-agricultural use within a specified period. This is similar to planning overage but more common in agricultural land sales. The clawback amount is typically a percentage of the difference between the agricultural value (the price paid) and the developed land value. For IHT: the clawback right is in the seller's estate and is valued at its discounted present value. Importantly, APR does not apply to the clawback right — APR applies to agricultural land, not to a contractual right to receive future consideration from a land sale.

IHT valuation: The probability of planning on ex-agricultural land is a key variable — in many cases the planning probability is low (especially on non-allocated land far from settlements), supporting a lower IHT valuation. Professional valuers with agricultural and planning expertise should be instructed.

Can APR or BPR apply to an overage right in the seller's estate?

No — APR and BPR do not apply to an overage right (the contractual right to receive future consideration from a land or business sale). APR applies to agricultural property (land and buildings occupied for agricultural purposes). Once the land has been sold, the seller no longer owns the agricultural property — they own a debt or contractual right. That right is not agricultural property and does not qualify for APR. Similarly, BPR does not apply to a contractual debt or overage right — BPR requires the asset to be a qualifying business interest (a trade, partnership interest, or unquoted shares), not a receivable. The overage right is an ordinary estate asset subject to IHT at 40% above the NRB.

How does HMRC approach the valuation of an overage right?

HMRC approaches overage valuations using the open market value principle — the price a willing buyer would pay on the open market at the date of death. In practice, there are buyers in the market for overage rights (specialist investors and investment funds that purchase overage interests). HMRC may seek a valuation from the District Valuer. The key variables: (1) probability of the trigger event occurring (planning permission, development milestone) within the remaining overage period; (2) expected value of the payment if triggered; (3) time to receipt; (4) discount rate for time and risk. Executors should instruct a RICS-qualified valuer with specialist expertise in overage and development rights — the valuation will need to defend against HMRC challenge.

What if the overage right is never triggered — can IHT paid on its value be recovered?

If the overage right lapses without being triggered (the planning permission is never granted, the overage period expires, or the developer defaults), the estate effectively paid IHT on an asset that turned out to be worthless. There is no automatic refund of IHT paid on the basis of an estimated value that subsequently turns out to be too high. The executors may have recourse if: (1) the valuation was clearly unreasonable at the date of death and can be shown to have been overstated; or (2) the value was estimated and a post-death event (the right lapsing) was specifically contemplated as giving rise to a corrective account. In practice, where the overage right lapses entirely, executors should file a corrective account to reflect the nil value — HMRC may refund excess IHT paid. Professional legal advice is needed.

Can the overage right be gifted away to reduce the IHT estate?

Yes — the overage right can be gifted as a potentially exempt transfer (PET). If the seller gives away the overage right (assigns it to the intended beneficiaries) during their lifetime, the 7-year clock starts running. If the donor survives 7 years, the PET is exempt from IHT. However: (1) the gift is a disposal for CGT purposes — CGT may be triggered at the date of the gift on the value of the overage right at that time; (2) if the overage is subsequently triggered (planning granted after the gift), the recipient receives the overage payment — which is income from their asset, not a further gift; (3) the donor must not retain any benefit from the gifted overage right — if they do, the gift with reservation rules may apply. Professional tax advice is needed before gifting an overage right.

Can the overage right be commuted for a lump sum during the seller's lifetime?

Yes — some sellers agree with the buyer to commute (buy out) the overage right for a lump sum. If a developer has been granted planning permission during the seller's lifetime, the seller might negotiate a lump-sum settlement of the overage right rather than waiting for instalments. The commutation proceeds (cash) are then in the seller's estate. From an IHT perspective, commutation replaces an illiquid and uncertain asset (the overage right) with a certain cash sum — potentially at a higher IHT value than the previously estimated overage right value, but with the advantage of certainty. The commutation lump sum can immediately be used for IHT planning: gifts as PETs, investment in BPR-qualifying assets, life cover.

Does an overage right affect the IHT position on an intestacy or partial intestacy?

An overage right is an asset of the estate on death and passes under the will or intestacy in the same way as any other asset. If the overage right is not specifically mentioned in the will, it passes as part of the residue. The executors must value it for IHT, pay any IHT due, and then distribute the right (or any proceeds received while administering the estate) to the residuary beneficiaries. If the right is received by the estate during administration, the proceeds are administered as part of the estate in the usual way. On an intestacy, the overage right passes to the statutory next of kin under the Administration of Estates Act 1925 — the rules of intestacy do not affect the IHT treatment.