Is a land value tax an innovative way of unlocking London’s housing problems, or a risk to the capital’s economy?
In the race to publish information before the lockdown ahead of next month’s mayoral election, the London Assembly’s planning committee recently issued a report outlining the pros and cons of a land value tax.
The main reason for considering such a tax is that it could provide the impetus to build an additional 276,000 homes, suggests lead author, chair of the assembly’s housing committee and Labour assembly member Tom Copley.
Despite potential benefits, the report is tentative in its recommendations, which are that the new mayor should commission a feasibility report into the topic within their first year in office and, if the results are favourable, run a trial within a limited area for at least five years.
Although an ardent supporter of LVT, Copley is realistic that any change won’t happen quickly: “It would take the best part of two mayoral terms – it is not a quick fix.” And he concedes that even if a political will can be mustered to support it, a land value tax will face heavy opposition. “There are a lot of vested interests that will be affected by it – the tax shifts the onus onto big influential landlords who will lobby against it.”
What do other members of the London Forum think?
Nina Skero, senior economist, CEBR: Economists from Adam Smith to Milton Friedman have advocated this approach to taxation pointing out that, as the supply of land is fixed and LVT is not, dependent on how the land is used, the distortive market effects are minimal and the costs less likely to be passed on to tenants.
While a shift from property to land tax may encourage housebuilding, some practical challenges arise.
Primarily, the valuation of all land would be a lengthy and expensive exercise which would probably lead to numerous disagreements and appeal processes between valuation office and landowners.
Adrian Owen, national head of residential consulting, BNP Paribas Real Estate: A land value tax is not a new idea, with proponents from the 18th century physiocrats to the modern day IFS. As an economic theory, it has some attractive features and is seen as overcoming several of the disincentives for growth in the existing tax system.
Stamp duty land tax creates a disincentive to buy property, council tax is regressive and has not been revalued in decades, and the business rates system is in need of reform to make it more responsive to the wider economy. Replacing all of these with a ‘simple’ land tax could, in theory, lead to a better functioning property market, although in practice such a move would be anything but simple.
As the GLA recognises, we have the challenge of accommodating unprecedented levels of growth in the capital, while trying to alleviate an existing, chronic undersupply of homes. Unfortunately, the years of disruption and stasis that such a fundamental reform of the tax system would create means that LVT is not a practical, near-term solution. Investigating how we can gradually reform our existing taxes to encourage growth, rather than ripping them up and starting again, would be more sensible.
Simon Cookson, real estate partner, DLA Piper: London’s authorities need to be cautious when considering a land value tax. There is no need to take a sledgehammer to crack a very small nut and London’s housebuilding market needs to be provided with incentives – more by a carrot, rather than stick, approach.
The commercial freedom for developers and land owners to determine when to build is to ensure the market is not flooded with supply when there are difficulties with the demand side. It is in nobody’s interest to create estates of unwanted homes.
To ‘value’ land based purely on its residential use is very dangerous. It ignores the other uses which make for balanced and prosperous communities.
Many London boroughs are already struggling to ensure there is enough employment use within their areas and this could compound the issue.
Nick Belsten, central London director, Indigo Planning: Anything to encourage housing delivery and affordability is worth exploring but, because of
the issues and complexities it is likely to cause, we are not convinced that an LVT would be helpful.
The assumption that a vacant site should automatically be valued on its optimum land value without the benefit of having a planning consent in place oversimplifies the complexities associated with the planning system.
This approach would have significant implications on affordable housing delivery, artificially inflating site values and impacting upon development viability.
Ultimately, it would reduce the level of affordable housing that a scheme could deliver.
Bill Page, business space research manager, Legal & General Investment Management: “In theory, land value tax has the potential to boost housebuilding by encouraging land’s optimum use. In reality, investors take a risk on land ownership in advance of state-backed improvements. This risk should be rewarded.
There are existing taxes which capture value and activity. These may not be perfect, but they work: council tax, stamp duty and rates are linked to local success. To replace them would introduce significant uncertainty and administrative burden. And who decides what optimum use is? It changes with property cycles.
To impose annual charges on an entity which may earn no annual income from land would constitute a tax on ownership, not a penalty for land-banking. It offers no better mechanism for the funding of housing and infrastructure than is achievable under fiscal devolution.
LVT has a sound basis, in theory and in international practice, but making better use of existing powers offers more solutions with fewer risks.
