A new stealth tax

Published 01st Jul 2007

The government is considering another levy on property, this time aimed at landowners, reports Jane Padgham
Gordon Brown has his beady eyes on our housing wealth — yet again. Not content with the bumper revenues from stamp duty, council tax and inheritance tax, the chancellor, like some latter-day sheriff of Nottingham, is considering imposing a new tax, planning-gain supplement (PGS), on the windfall enjoyed by landowners when they obtain planning permission.
The government insists the money will be ploughed into infrastructure. Critics, including the Conservative party, are not convinced, and warn it could add to the shortage of housing by making development less attractive.
The idea of PGS was first mooted by Kate Barker, a member of the Bank of England’s monetary policy committee, in her 2004 report on the housing market and was taken up by the government a year ago. In theory, the estimated £500m it is predicted to raise would be used to fund the extra schools, roads and health facilities needed to support the new homes that the government would like to see built across the country.
Details are still sketchy — ministers have yet to put a figure on the levy, although 20% of any uplift has been suggested — but the Treasury has promised to flesh out the plans by the end of the year, probably in next month’s pre-budget report. It is expected that the tax, if approved, would be introduced from 2008 on both residential and non-residential developments, be UK-wide and become payable at the start of the development work.
Despite the lack of clarity surrounding the proposal, the year-long consultation has already stirred up a hornet’s nest. The Tories have described PGS as a stealth tax on homes and urban renewal and have vowed to oppose the plans.
“Higher taxes on development will undermine regeneration and inevitably be passed on in the form of higher prices for new homes,” says Caroline Spelman, shadow local government secretary. “Labour’s proposals look set to undermine the housing market and discourage the provision of affordable homes to rent and buy.”
Given the Tories’ opposition, the housebuilding industry claims PGS, dubbed “planning-pain supplement”, could result in development of their vast landbanks grinding to a halt. “If PGS is introduced before the next general election, as is expected, there could be a complete freeze in development in anticipation of a new government that would scrap PGS,” says Louis Armstrong, chief executive of the Royal Institution of Chartered Surveyors.
Liz Peace, chief executive of the British Property Federation, says the whole idea shows a complete lack of understanding of how the development process operates. “First, it is very difficult to calculate the precise increase in land value after planning permission has been granted,” she says.
“Second, developers will have to pay out huge sums at the very point where they are cash-short. And third, any sensible developer works hard to build a good relationship with the local authority, and PGS breaks that link.” This is because the tax is likely to be levied at government level, prompting suspicion that the money may not be channelled back to the communities where it is raised.
And so the objections go on. John Slaughter, director of external affairs at the Home Builders Federation, believes imposition of the tax could undermine the government’s commitment to more affordable housing and urban regeneration.
Emma Wild, senior policy adviser at the Confederation of British Industry, argues that smaller developers would be hardest hit. “Their margins are much tighter and their room to absorb additional costs much less, so many small-scale projects would suddenly become unviable,” she says. It would also reduce garden-grabbing, the controversial practice under which householders sell off sections of their gardens for development.
The new tax has its supporters, however. Gideon Amos, director of the Town and Country Planning Association, backs the principle of the tax, although he stresses that the devil will be in the detail. This means, he argues, that the rate should not be set at more than 20%, and at least 70% of the revenue raised through it should be ploughed back into the area where it was raised.
“Landowners derive huge windfall gains from the stroke of the pen of the planning authorities, but it is society that actually gives land its value, in the shape of roads, schools and so on,” says Amos. “It is only fair that the community at large should benefit from the uplift.”
Property experts say the barrage of criticism suggests that parliamentary support for the proposed tax is slipping and the idea may yet be shelved. A report by the cross-party communities and local government committee published earlier this month was less bullish than expected, describing concerns as “justifiable” and insisting that the Treasury carries out a full cost-benefit analysis before rushing in the new legislation.
If PGS is shelved, what could be a viable alternative? Liam Bailey, head of residential research at Knight Frank estate agency and a special adviser to the committee’s inquiry, advocates an extension of the existing section 106 agreements, whereby developers negotiate with local councils to come up with a specific sum they must pay towards infrastructure. Research from Sheffield University in March found that only 7% of planning permissions granted in a typical year include such agreements, so there is clearly scope for expansion.
“In principle, PGS is an admirable idea, but in practice it won’t work,” says Bailey. “Not only will it gum up the system, but I also can’t see any reason why it should work any better than similar taxes in the past. The government would be better off taking section 106, extending it and making it mandatory.”
Perhaps Robin Hood will defeat the sheriff of Nottingham after all.

Source: ' Times Online '

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