Plans for a new Land Value Tax have been outlined in a paper prepared by the Planning Committee of the Greater London Authority. It calls on the new mayor to fund further research into such a tax, declaring it has the potential to encourage undeveloped or underused land to be developed – largely for housing.
The concept would tax land based on its optimal use, whether it was developed for that or not. A landowner would therefore be incentivised to carry out an optimal development, in order to best cover the cost of the tax, which could replace the existing council tax, business rates and stamp duty.
The paper has been put together by assembly member Tom Copley, who notes in the foreward: “The greatest challenge facing the next mayor will be achieving a step change in the level of housebuilding in London.” With construction targets far from met, “new and bold thinking is required”, he argues.
Copley says the Land Value Tax is used elsewhere in the world, in countries including Denmark and Estonia, and it “provides incentives for bringing land into more productive use, and discourages keeping land empty or derelict.” The report says one data source has identified 1,973 hectares of land not currently used for housing in the capital, which could be developed – potentially creating 276,000 homes.
He concludes that the time is right to test out a daring new approach, because London is facing unprecedented levels of growth, and there is the challenge of funding it sustainably. The mayor’s office has demonstrated it can lead a growing world city responsibly, and there is the know-how to deliver strategic projects.
The tax would require the planning system to identify optimum land use for each site, something not currently a function of the system, the report acknowledges. It also acknowledges that introducing such a change would be fraught with practical challenges, creating winners and losers that might be politically contentious.
LVT would effectively be levied in a similar way to business rates today, based on the defined use of the land; it would be levied irrespective of the type or value of property developed on that land, and charged to the owner, not the occupier. It could also help reduce the capital’s reliance on Whitehall, allowing London to become more financially independent of central government.
The report recommends the new mayor looks into the powers necessary to run such a tax, and commissions a feasibility study. It also suggests a trial, perhaps with a pilot scheme at Old Oak Common within the Park Royal Development Corporation’s area.
LPA Perspective: This is scary stuff – should the momentum for this idea gather, it could upset plenty of those in the development world.
Yes, LVT has worked in some places. Harrisburg, Pennsylvania credits its recovery with the implementation of a land tax, replacing property taxes over a staged period. This was a city on its uppers after a major hurricane, and had lost a third of its population. But there are major practical problems, as well as some philosophical issues.
Currently, land use is decided by its owner, coming into contact – sometimes a negotiated contact, sometimes an embattled one – with the planning system. LVT would require local planners to decide what should go where, effectively reducing the flexibility of innovative developers and designers to transform neighbourhoods with imaginative regeneration projects.
And there is the right, established over a long period, for a landowner to do what they want with their property, within certain planning rules and restrictions; with doing nothing being just one of those options. By using LVT, a landowner is penalised for leaving land fallow or, underoptimised. And one reason why a landowner might feel minded to knock down a currently unused building, is the fact that business rates relief was removed on empty buildings – a relatively recent change that has led to huge waste and substantial demolition of older properties.
Land assembly, planning negotiations, and the inability of public bodies to sort their land holdings are all reasons why sites don’t get developed to their full potential. Land banking, often claimed as an issue, has rarely been proven to happen in reality. There is also the issue of market timing – why build a new office block in the City of London, for example, if there is plenty of new office space yet to be let?
The UK system is also well used to housebuilding developers taking options on farm land, which they then push to get included in a local plan, for it to – some years later – become housing land. Local planners will now have an incentive to get the land zoned for development sooner, rather than later, to increase their tax base.
Then there are the practical issues, in a city of the scale and vibrancy of London. Establishing values, and uses, will be problematic. And as the recent experience of the Community Infrastructure Levy has demonstrated, when adjacent districts have substantially different charging levels applied, there can be unintended consequences.
LVT is a big idea – and one that may merit further study, perhaps a pilot – but let’s not get too excited, too quickly.