By legally and fiscally separating the land transfer from the construction agreement, opportunities arise for clearer risk allocation, potential tax optimisation and access to guarantee and warranty schemes. In this blog, we explain how the separate purchase and construction model works, the advantages it offers and the situations in which it is particularly suitable.

The separate purchase and construction model

Under a traditional purchase and construction agreement for a new residential property, the buyer acquires the land from the same party who is contracted to construct the property. Legally and fiscally, this is treated as a single transaction – the delivery of a newly built dwelling.

By contrast, under the separate purchase and construction model, the buyer first acquires the land or apartment rights from party A (usually a developer) and subsequently enters into a separate construction agreement with party B (the contractor). Consequently, the transfer of the land and the construction of the building are treated as two distinct supplies. 

Tax benefits and points to consider

In a traditional combined agreement, where the land sale and the construction are regarded as one composite transaction, the entire amount – covering both the land value and the construction cost – is subject to 21% VAT. For residential buyers, this VAT is generally a non-deductible expense. However, no transfer duty is payable in this case due to the concurrence exemption.

Under the separate purchase and construction model, the land transfer and the construction agreement are treated as two distinct transactions. For land with existing structures, the land purchase is subject to 10.4% transfer duty. For vacant land, the land purchase is subject instead to 21% VAT. In both cases, the construction agreement itself attracts 21% VAT.

To qualify as two separate supplies, there must be a clear division between the land transfer and the construction agreement. The land seller and the contractor must operate entirely independently. Any connection, cooperation or shared responsibility between them should be avoided. For the land transfer to fall under transfer duty rather than VAT, completion must occur while any existing buildings remain in place – that is, prior to demolition. 

In short, the buyer acquires the land in its existing (“as is”) condition and assumes full responsibility for demolition of existing structures and new construction under a separate agreement with the contractor. For residential development projects on land with existing structures, using the separate purchase and construction model can significantly reduce the overall tax burden.

Risk allocation and limitation of liability

The model also provides a clear allocation of risks and responsibilities. The seller does not assume any liability for the building works, while the contractor bears no responsibility for the land transfer. This is particularly attractive to developers, who often prefer not to act as intermediaries between the contractor and the buyer when dealing with completion defects or warranty issues. Conversely, contractors are not exposed to risks such as soil contamination, which remain with the seller. By separating the contracts, liabilities are allocated to the parties best positioned to manage them.

Access to warranty schemes

Access to warranty schemes, such as SWK or Woningborg, can also be an important consideration. Not all developers and construction companies are registered participants. Since banks frequently require such coverage when financing newly built homes for private buyers, it may be necessary to organise the project under the separate purchase and construction model. The same applies to institutional investors acquiring newly built residential property. In that case, the construction agreement is concluded directly between the buyer and a certified contractor, without the developer acting as an intermediary.

Enhancing project feasibility

The financial viability of new construction projects is frequently challenging. In this context, the separate purchase and construction model can materially improve the business case, especially for projects on land with existing structures. By separating the land transfer from the construction agreement, the land element may fall under transfer duty rather than VAT – but this requires careful contract drafting, precise timing and a strict separation between the parties involved.

In addition to the potential tax advantages, the model offers clearer risk allocation and may also enable a project to proceed where the developer is not a participant in a warranty scheme, but the contractor is. As such, this approach is a practical tool for improving both the feasibility and continuity of new construction projects.

If you would like more information or wish to discuss the most suitable approach for your project, please do not hesitate to contact us. The tax advisers and lawyers in our Project Development & Construction team will be happy to assist.