A levy on the value of land regardless of what is on it would encourage efficient use of land within planning permission rules
Britain must build more homes. That was the chant from MPs on left and the right alike as they returned from their summer breaks. It’s the latest response to deep frustration at the beleaguered state of the economy.
Tory backbench MPs are as frustrated as their Labour counterparts at the seeming lack of action in the Treasury. A new house-building drive is one policy on which they can all agree.
There could not be many quicker ways to improve the country’s infrastructure and generate jobs. It is credited with having been the cure for the 1930s slump and there is a chronic shortage of homes, especially of the two and three-bedroom variety that young families need.
The Treasury, rather timidly, has already said that it wants the big occupational pension funds to invest in residential property and hinted that there may be more flesh on the bones of the idea in the autumn statement in December. We’ve also heard the prime minister announce a package of measures designed, he says, to improve confidence.
But with little real progress despite cross-party agreement, the property industry descended on Newport in south Wales over the weekend to discuss where the industry goes from here.
Property Week magazine summed up the demands of the first discussion panel. It said the assembled building company bosses emphasised “the need for tax breaks, changing stamp duty, removing politics from planning and the need for public investment to get the sector moving”. In other words “leave us unfettered by taxes on property transactions and planning laws and we will get on with the job”.
This is the usual self-serving nonsense from an industry that should be as discredited as the banks for the part it played in the financial crisis. All the major property companies were in serious trouble at the beginning of 2009, prompting the then Labour government to hand over a £1bn bung to keep them going.
The Treasury understood that much of the debt owed to banks belonged to property developers and that allowing them to go bust would mean more banks ending up in taxpayers’ hands.
Many of the smaller, privately owned building companies took their share of the cash, paid their directors millions of pounds and promptly went bust anyway. It was a deceit perpetrated on a desperate government that was thrashing around for ways to save the economy from collapse.
Now the property industry wants another payday based on the false premise that giving them tax breaks and the freedom to build anywhere will make Britain a better place.
Politicians are easily strong-armed by powerful lobby groups and in the Tory party lobby groups don’t come much bigger than the property industry. Only City firms are bigger donors – and they want to get the bricks and mortar show back on the road after enjoying the biggest party of all time trading property assets before the crash.
If property companies saw any profit in building at the moment, they would be knocking up homes all over the country. They are sitting on thousands of hectares of land with planning consents. They have sacked many of their staff and refinanced their debts. Most are reporting healthy profits.
They don’t pay much in corporation tax because many are still writing off the debts from the crash against their tax bills. But they are building only on small plots, mainly in the south and richer suburbs around the big cities, to conserve their cash.
The only conclusion to draw is that developers need sticks, not carrots. More money would just go into company directors’ pay, bonuses and pensions.
The stick would be a reform of the tax rules to make it unprofitable to sit on unused land. It is a point made by the Joseph Rowntree Trust in a report that debunks the building industry’s arguments, called Tackling Housing Market Volatility in the UK: A Progress Report. The report proposes reform of the council tax system as part of a transition to a land value tax. It joins the Institute of Fiscal Studies and the Paris-based thinktank the Organisation for Economic Co-operation and Development in recommending a land value tax as a basis for property development without booms and busts.
At the moment property taxes come in the form of stamp duty, which is applied to the sale of a householder’s main residence, and capital gains tax, which is applied to the sale of other properties owned by the householder. Both these taxes extract cash from a transaction. While there is no transaction, no tax applies. Council tax is paid annually but, as many people recognise, it is out of touch with today’s property values.
The report says: “Under the current system, people in cheaper houses pay a higher proportion of council tax than people living in expensive ones. A family living in a £320,000 house has to pay only twice as much council tax as a family living in a house that costs £68,000 – despite their home being more than four times as valuable.
“Estimates suggest 3.7m households are worse off as a result of the failure to revalue council tax, because households would have moved down bands.”
A revalued council tax with several more bands at the top end would make the current system fairer. But council tax is only paid on occupied property. This allows developers to leave land unused until the market is deemed ready for building to take place.
A land value tax (LVT) would apply to the value of land regardless of what is on it. This would encourage the most efficient use of land within planning permission rules and environmental standards. It is widely believed that such a tax would push down the value of land, which is why the Joseph Rowntree Trust has proposed transitional arrangements.
The alternative to reforming and extending council tax would be to apply the LVT at a very low level and with plenty of exceptions (for elderly single people living in large properties for instance), with incremental rises over time. Another suggestion is just to tax development land at first.A more embracing LVT could be offset by reductions in income tax and getting rid of stamp duty and capital gains on property, which in turn would encourage more sales.The OECD has argued that a switch from income taxes to wealth taxes would have the benefit of discouraging wealth hoarding in favour of work.
There is a basic cost to the project, which would be an army of valuers touring the country to assess how much tax to apply. But this would be small beer compared to the benefits.
The JRF says: “As MPs gather for their party conferences and the new housing minister settles in, now is the time to fix the underlying problems in the housing market. It will take huge political courage to achieve this – but we cannot afford to leave people or our economy helplessly exposed to our volatile housing system.”
While most ordinary families would gain from a land tax, it is a scary prospect for older middle income households that have benefited hugely from the house price boom of the last 20 years. For some it could prove an extra burden. But their children would find it easier to afford a home.
Need a Loan? Visit Secured Loans Broker.
View full post on Free Secured Loans Advice