4Alternative approaches to land value capture
114.As reflected in the structure of this report, the vast majority of the evidence we received during this inquiry focused on changes to existing approaches to land value capture and reforms to existing legislation. However, we did hear some suggestions for more innovative approaches to capturing uplifts in land value, which may be appropriate for central government and local authorities to consider in further detail. This chapter, therefore, briefly highlights some of these approaches and recommends that councils be given greater flexibility to trial these and others, as they consider appropriate, to fund infrastructure and affordable housing in their communities.
Development Rights Auction Model
115.TFL and the GLA told us they had considered the introduction of a Development Rights Auction Model for zones with high development potential, explaining the principle of such a scheme:
The model requires the preparation of an integrated zonal development plan for zones of influence around new station locations on a new rail project. The auctioning authority, which would have powers to assemble land and grant planning permissions, would coordinate land pooling and auctioning of developable plots. It is expected that as a result of new transport investment and coordinated master-planning, the value of the pooled land would be higher than the value of individual land holdings before assembly. The auction proceeds, above a set reserve price, would then be shared between the landowners and the auctioning authority, which would use its share to fund transport investment.207
Julian Ware explained that, while this approach had attracted some initial interest from the Government and the Mayor, further work by the GLA and TFL found that this model was unlikely to work in London or be an effective way to pay for transport projects there.208 However, there may be some scope for this model to be applied in other regions.
Publicly-owned land
116.As we learned during our visit to Germany and the Netherlands in September, much of the success of the high-profile developments in Freiburg and Amsterdam rested on the fact that a substantial proportion of the land was already owned by the public sector. The local municipalities were able to capture increases in the value of the land by selling, or leasing, sites to developers, and using the profits to reinvest in the infrastructure and public services made necessary by the planned developments. In the Vauban district of Freiburg, for example, we heard that the land value that was captured by the local municipality covered almost the entire €95 million cost of providing infrastructure (including a school, streets and public transit) to the 34-hectare site. Ownership of the land also gave Freiburg and Amsterdam significant control over the types of housing to be constructed by developers, allowing them to require a certain proportion of affordable or social housing.
117.Of particular interest, we heard that the City of Amsterdam had recently introduced incentives to require developers to build sites within an agreed timeframe. Developers were required to pay for an option to develop on publicly-owned land, but if they failed to do so within an agreed time, they would lose forfeit both their fee and their right to develop the land. The Minister of State for Housing told us that he expected that similar agreements were already used for publicly-owned land in the UK:
Certainly when you look at sites that involve Homes England, it will be doing exactly that. There will be a performance basis on that. There is a model emerging now, certainly in large-scale residential development—I have one in my constituency—of the notion of a master developer, which is effectively appointed by the local authority on a local site. They have sub-developers that are given portions of the large site to develop and they are given more dependent on performance. For the one in my constituency, there is probably 10 years of work there. The idea is that you have 10 years of work as long as you perform on each site that you are given. If you do not, they will find somebody else.209
118.The Government owns tens of thousands of acres of land across the UK and so there is much that can be learned from Germany and the Netherlands with regard to capturing increases in value from publicly-owned land. The Government should reflect on the experience of Freiburg and Amsterdam to ensure that, where public land is put forward for residential development, the maximum value is captured for new infrastructure and public services. This may not always equate to selling public land to the highest bidder, but instead on the basis of the proposed levels of affordable housing or commitment to providing the necessary infrastructure.
119.The compulsory purchase reforms we have recommended in this report would give greater powers to local authorities to assemble land and, in so doing, achieve a higher level of control over developments in their areas. As we saw in the Netherlands, on publicly-owned land local authorities would have greater power to introduce incentives to require developers to build sites within an agreed timeframe, through the use of options to develop and forfeitable fees. Public ownership of land for residential development would likely lead to greater developer cooperation, higher levels of affordable housing and faster build-out rates than it is currently possible to achievable through the existing planning system.
Taxation on landowners
120.The Royal Town Planning Institute argued that a key problem with the current system of contributions is that they are paid for by developers rather than landowners, who are the primary beneficiaries of land value uplifts. They called for a new system of development taxation to be levied on landowners.
Taxing landowners directly would have the added benefit of avoiding viability negotiations around planning obligations, since uplift would be captured at the point of sale to the developer [ … ] The taxable amount would be everything above the existing use sales price as determined by a transparent existing land use evaluation.
They suggested that the tax level could be based on what was needed to encourage release of land and argued that this would vary depending on the land use, with residential use taxed at a higher rate than industrial use.210
121.Taxation of landowners at the point of development is, however, complicated by the operation of the land options market. A land option is a contractual agreement between a developer and a landowner, which gives the developer the exclusive right to purchase the land at some point in the future. Typically, under option agreements, landowners agree to sell to a particular developer at a discount, typically around 80% or 85% of market value. The discount reflects the fact that the developer can incur substantial costs in obtaining planning permission. But this also distorts the true value of the land, a point made by Daryl Philips of the District Councils’ Network.211 In the context of looking at new forms of taxation on landowners, it would be important to carefully consider the point at which this should be imposed and that it takes into account the full value of the land.
Taxation of existing developments
122.This inquiry has focused on mechanisms for capturing the increases in land value on new developments that arise from the granting of planning permission. However, it was noted by several witnesses that some of the most significant increases in land value are to be found within existing developments. For example, Professors Crook, Henneberry and Whitehead told us that, “Perhaps the most important point to be made here is that restricting land value capture to new development is a major limitation which affects economic efficiency and equity as well as revenue raising capacity”.212
123.Julian Ware highlighted that, in London, it was estimated that, of the anticipated £87 billion uplift in land values arising from eight prospective transport infrastructure projects—including Crossrail 2—approximately 65% was likely to go to the existing residential market.213 While there were mechanisms to capture some of this additional value on existing commercial properties, including through business rates, there are no land value capture mechanisms for existing residential properties.214 The GLA and TFL therefore proposed two mechanisms to achieve this: the zonal assignment of Stamp Duty Land Tax, with a framework for calculating and assigning transport-specific uplift; and a Transport Premium Charge, where a proportion of the land value increase associated with a transport infrastructure scheme is paid at the point of sale of a property.215 However, the GLA and TFL acknowledged that such mechanisms would be “extraordinarily difficult” and their design would need to be “seen as fair and proportionate to the value uplift enjoyed by the land and property owners”.216
124.Others, including the Royal Town Planning Institute, noted that primary residences are currently wholly exempt from Capital Gains Tax despite significant increases in house values in recent decades, and that reform of this tax could lead to a significant increase in revenue.217 Similarly, the Town and Country Planning Association called for, “The restoration of a modest element of betterment taxation as part of capital gains tax which should be directed towards regeneration in low demand areas.”218
Land Value Taxation
125.An annual tax on land values—updated regularly to include price increases associated with infrastructure and development—was highlighted in several written submissions as one potential mechanism to comprehensively capture uplifts in land values on existing properties.219 There is a very substantial body of evidence for and against the introduction of a Land Value Tax, although we felt that this issue was outside the scope of our inquiry. However, we note that Taxpayers Against Poverty told us that a Land Value Tax could be a “secure, progressive source of revenue”, which could “gradually replace inefficient and regressive taxes like council tax, business rates and stamp duty”, while the Royal Town Planning Institute expressed their view that it could counteract speculation, promote development and reduce land prices.220
126.Others, however, told us that a Land Value Tax would be “completely impractical”, with Barratt Developments highlighting that significant resources would be required to maintain an up-to-date value for every plot of land, that the current planning system inhibits the ability of landowners to make more productive use of their land, and that it was unlikely to raise significantly higher revenues without large tax increases for some landowners, “especially homeowners in the South with gardens”.221
127.Given cross-party support for new approaches to land value capture, the Government should be flexible and support individual local authorities in piloting some of the more innovative approaches to land value capture that have been suggested during our inquiry and elsewhere. A programme of innovative pilots would allow local authorities to tailor approaches to their local circumstances and provide useful evidence as to which methods of land value capture are most effective.
128.A truly efficient and equitable system of land value capture should not focus solely on new developments, but should also address how existing properties benefit from development and particularly from public investments in local infrastructure. The Government should commission a cross-departmental project to consider how this wider goal might be achieved and report back to this Committee within 12 months.
216 Q60-Q62 (Julian Ware, Transport for London) and Greater London Authority & Transport for London (LVC091), para 3.9
Published: 13 September 2018