Forward funded development projects offer institutional investors a way to dramatically reduce Stamp Duty costs while providing developers with a committed buyer who funds the build.
Instead of buying completed developments and paying SDLT on the full value, investors purchase the development land first and fund construction as it progresses.
This timing difference creates substantial tax savings.
An institutional investor acquiring a completed £10 million development pays SDLT on that full amount. But if they buy the development site first, for £2 million, and then fund the construction, they only pay SDLT on the land purchase value.
For developers, this structure solves two problems.
You get reliable development finance throughout your build programme, while the SDLT advantages make your project more attractive to institutional funders.
The investor gets the same finished asset but with dramatically lower tax costs.
This approach works across residential and commercial projects, with residential developments seeing the biggest savings due to higher corporate SDLT rates. The structure is well-established and accepted by HMRC when properly implemented, making it a proven tool for both securing development finance and reducing investor tax liability.
What Makes Forward Funded Projects Different
From a developer’s perspective, forward funding delivers three significant advantages that transform how you approach large projects.
You get substantial cash flow from selling the development site early, which improves your financial position before construction even begins. This upfront capital injection can free up resources for other opportunities or provide working capital throughout the build.
The structure also provides certainty of development finance for your entire project.
Rather than worrying about funding gaps or changing lender requirements mid-construction, you have committed capital from an investor who’s already bought into your scheme. This removes a major source of stress and allows you to focus on delivery rather than financing.
Perhaps most importantly, forward funding creates a more balanced approach to risk compared to forward sales.
Instead of carrying the majority of construction risk yourself, you share it with an institutional partner who has both the resources and expertise to handle complications.
The investor has skin in the game from day one, creating a genuine partnership rather than a simple buyer-seller relationship.
How the Finance Structure Works
The process starts once you’ve secured detailed planning permission for your scheme.
You’ll negotiate heads of terms with an institutional funder who agrees to purchase the land and fund construction. This removes the need for the developer to have development finance.
Legal documentation then formalises both the land sale and the development agreement as separate but coordinated transactions.
This separation matters enormously for tax purposes.
The land transfer and construction contract must be genuinely independent agreements, each enforceable on its own terms. Payment schedules align with your construction programme and cash flow needs, with the funder taking ownership of completed works as payments are made.
Let’s talk property finance!
Creating Tax Benefits
This early transfer of land ownership creates the SDLT advantage.
When the investor acquires the bare land, Stamp Duty can only apply to that much lower value.
The subsequent construction costs, which happen after they already own the land, don’t trigger additional SDLT liability. You’re essentially enhancing an asset they already own, rather than creating a new chargeable transaction.
Who Can Access Forward Funded Finance
This approach works best for larger development projects where the absolute SDLT savings justify additional structuring complexity. You’ll need schemes worth several million pounds to make the economics work, though there’s no absolute minimum size.
The sweet spot occurs when land represents roughly 15-30% of your total development value.
Projects where land dominates costs offer limited benefits, while schemes with very low land values may not generate sufficient savings to warrant the additional complexity.
Residential developments see the most dramatic benefits; build-to-rent schemes, student accommodation, retirement housing, and large-scale housing developments are prime candidates.
Commercial projects work well too, particularly offices, retail developments, and industrial schemes.
You’ll need an established track record and financial capacity to attract institutional funders. These investors want confidence in your ability to deliver complex projects on time and on budget.
Risks and Compliance
The SDLT advantages rely on established legal principles from the Prudential Assurance case, which allows separate treatment of land transfers and construction contracts when they’re genuinely independent.
Your legal structure must demonstrate real commercial separation between acquiring land and building on it.
HMRC accepts properly structured arrangements but scrutinises those that appear primarily tax-motivated. Section 75A anti-avoidance provisions give them power to challenge arrangements and aggregate consideration across all transaction steps if they believe the structure lacks sufficient commercial substance.
Building a robust defence means documenting genuine commercial reasons beyond tax planning.
Improved cash flow, risk sharing, access to institutional expertise, design input, and funding certainty all provide legitimate business justification.
Professional legal and tax advice is a must.
When Forward Funding Doesn’t Fit
This approach isn’t your only option for development finance, though it’s unique in combining funding with Stamp Duty tax efficiency.
Normal development loans from banks provide straightforward borrowing against your project, and ground-up development finance is used to purchase the land and then fund the build.
Forward purchase agreements offer funding certainty but without the tax benefits for the investor.
Buyers commit to acquiring your completed development at agreed prices, but they don’t take early land ownership. Joint venture structures work well for larger projects where you want to share both risks and rewards with institutional partners.
Mezzanine finance bridges the gap between senior debt and your own equity, allowing higher leverage on development projects. Some schemes use multiple structures to optimise their capital stack, combining different approaches for maximum efficiency.
Each option has different implications for control, risk, returns, and tax treatment.
This approach suits developers who value funding certainty, even if it means sharing project control with institutional partners.
Specialist Brokers
Institutional development funders rarely work directly with developers, preferring established broker relationships that bring them vetted opportunities.
These funders want to see projects that meet their criteria and developers capable of successful delivery.
Specialist brokers understand which institutions are actively deploying capital in different sectors and can match your project appropriately.
The coordination role becomes essential in these multi-party transactions, managing relationships between you, the funder, lawyers, tax advisers, and other professionals.
Market intelligence provides another layer of value.
Brokers know current funder appetite, prevailing terms, and how market conditions affect different project types. This knowledge helps position your development effectively and negotiate the best available deal structure.
Taking Action
Start by assessing whether your project characteristics suit this approach.
You’ll need detailed planning permission, realistic cost projections, and sufficient scale to justify additional structuring costs. Projects worth £5 million or more with reasonable land-to-development cost ratios usually work best.
Assemble your professional team early, including lawyers experienced in these structures, tax advisers who understand SDLT planning, and brokers with institutional relationships.
Allow 3-6 months for arranging the finance, as these transactions involve complex documentation and detailed due diligence.
If you think this approach might suit your development project, speak to a specialist broker who can assess your scheme and explain your options.
To speak with a specialist broker, please call us on 020 3951 2828.
FAQ
Forward funded development projects deliver SDLT advantages by focusing the stamp duty tax liability on initial land value rather than completed development value. When an institutional investor purchases your development land early and funds construction progressively, SDLT applies to the lower land value instead of the much higher completed project value. This can save hundreds of thousands in tax while providing development finance.
Forward funded development projects typically need to be worth several million pounds to justify additional structuring costs. Projects worth £5 million or more with land representing 15-30% of total value usually work best. There’s no absolute minimum, but smaller schemes may not generate sufficient SDLT savings to warrant the complexity.
Institutional investors including pension funds, insurance companies, real estate investment funds, and specialist property investors provide forward funding. They typically work through established broker relationships rather than directly with developers. These funders particularly favour sectors like Build-to-Rent where they want long-term rental income assets.
Yes, detailed planning permission is required before institutional investors will commit to forward funded development projects. This de-risks the arrangement by removing planning uncertainty. Some investors might consider projects with outline permission if particularly attractive, but detailed consent significantly improves your chances of securing competitive terms.
Traditional development loans provide straightforward borrowing but offer no specific Stamp Duty advantages for either party. Forward funding combines development funding with substantial SDLT savings but involves more complexity and sharing project control. The choice depends on whether tax savings justify additional structuring requirements.
Yes, forward funding can work alongside other finance structures. Some projects combine it with mezzanine finance, senior debt, or joint venture arrangements to optimise their capital stack. Each structure has different implications for control, risk, and returns, so professional advice helps determine the best combination for your specific project.
