After the ‘dementia tax’, will we see a land value tax?

23 May 2017

Tax is an important part of daily life in any sophisticated economy. The Conservative Party manifesto mentions tax around 30 times, and that’s disregarding what has become known as the 'dementia tax'.

Tax is one of the preferred tools in the kit box of economic engineering. This toolkit can produce tax machinery of stupendous complexity which has to be navigated on a daily basis by ordinary individuals and companies, and any tax changes will influence behaviour.

Housing is a case in point. Before looking at pages 70-72 of the manifesto, which address housing supply and the vexed question of affordability, it's worth reflecting on the idea of a property-owning democracy facilitated by the tax system. Of course, over the years, that concept has been significantly eroded. Income tax relief for mortgage interest payments was curtailed, and then eliminated. While the continuing capital gains tax exemption is very valuable, high prices mean that getting on the housing ladder is still aspirational for many. These aspirations have been fostered by a range of government initiatives including Right to Buy and Help to Buy.

The Conservative manifesto promises a dramatic increase in the construction of high-quality, affordable homes with a marked change of emphasis in favour of council housing and housing associations. While critics have expressed concern that the new rented accommodation will be sold within 10-15 years, with a right to buy in favour of existing tenants, the manifesto contains a telling reference: ‘we will work with private and public sector house builders to capture the increase in land value created when they build’. That’s a land value tax.

Those with long memories will recall that the UK had a brief dalliance with development land tax in the mid-1970s. Since the early 1990s, HMRC has reviewed the possibility of introducing a land value tax. At its simplest, this would tax the uplift in value enjoyed by landowners when they sell sites for development. It could also tax existing property occupiers whose properties increase in value because of improvements in local infrastructure, but I don’t think it promises a discount for those occupying properties whose value fell as a result of a new dual carriageway running past their front doors.

It’s not clear whether the Conservative manifesto proposal will usher in a national land value tax, or whether it will be more akin to the traditional section 106 agreements requiring developers to undertake limited infrastructure work. However, if the land value tax targets the gain made by the landowner who sells a site for development, then it will strike at a key component of the existing business model for house-building and could have a significant impact on the future UK housing landscape.

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