In Land Revenue: the case for a Land Value Tax in the UK

8th May, 2013 11:12 am

Our current land economy serves us badly. The landed are getting loaded through no hard work of their own, while too few ordinary people can afford a decent home. With no tax on empty land in the UK, it can be more lucrative to acquire and hold onto swathes of empty land, watch its value rise as others invest in the area, and then sell it, than it is to develop it for people to live or work on. A Land Value Tax, targeted at unproductive wealth, could tackle this land-banking, spur the development of much-needed new homes, and help kickstart our ailing economy. In Land Revenue, a new paper published today by CLASS, adds to a growing chorus of voices from across the political spectrum advocating an age-old idea lent renewed currency by today’s straitened and unequal times.

Two thirds of the UK’s 60m acres of land are owned by just 0.36% of the population. An annual Land Value Tax levied on all land except that under occupied primary residences worth less than £2m would affect these wealthy landowners rather than ordinary homeowners and promote capital investment rather than idle speculation.

It would address a long-term driver of our chronic housing crisis – lack of land supply – by encouraging efficient use of land within the constraints of the democratic planning process. The message it would give is that those who own land should use it. And, given land is a visible, fixed, immovable asset that cannot be hidden or offshored, a Land Value Tax would be impossible for the rich and powerful to avoid.

It would more equitably align risk and reward. When the community as a whole, or the state on its behalf, takes a risk and invests in an area, for instance by developing its infrastructure, land values will rise and in turn should be taxed, returning a proportion of the gain to the public purse. Infrastructure investment could, in this way, become self-financing. A well-rehearsed example is London Underground’s Jubilee Line Extension which cost the taxpayer £3.5bn but resulted in a £10-13bn increase in land values along the route.

For it to work, compulsory registration of all land holdings would need to be introduced and enforced. Asset-rich but income-poor (generally older) people living in very expensive homes could defer payment until sale or transfer of the property. Calculations of the annualised market rental value of unimproved land should be based upon that land’s optimum permitted use. This would recognise the validity of different uses of land, so farmers, for example, would not go unduly punished for using their land for agriculture.

A new Land Value Tax should probably replace Business Rates and Stamp Duty. Council Tax would remain, although it is also in need of serious reform. Land Value Tax on very expensive primary residences would then supplement the Council Tax on them, which at that end of the market accounts for a tiny proportion of a property’s value.

Land taxes of various sorts exist in Australia and the USA, Denmark and Estonia, Taiwan, Hong Kong and Singapore, South Korea, Japan and some Caribbean states. Any attempt to introduce a Land Value Tax in the UK should draw on learning from these places.

Introducing a Land Value Tax here will take political courage, but it could help to deliver the house-building revolution, and the economic revival, our country desperately needs. It will mean facing down vested interests, not least the big land-banking ‘developers’ who deliberately drip-feed properties onto the market, making large profits on small volumes of output, even though they have the land and the country badly needs more homes. It will take a manifesto commitment, a real mandate, and no doubt a battle in parliament. But, at least in some sense, this land is ours, and our tax system should reflect that fact.

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  • Having read the report, it’s an interesting document worthy of discussion – so long as it replaces existing tax structures (like stamp duty and business rates, as the report suggests) and protects farmers – many of whom will have fields out to fallow long-term due to flooding or poor market conditions.

    One story that I think we should learn from. My grandfather lived in relative poverty, but he was a skilled tradesman. He managed to cobble together enough money to buy a quarter acre (land in North Wales was much cheaper then!), and used his skills to build 4 homes with his own bare hands. He sold three, lived in the other, made a modest profit which was then used to give him, my grandmother and father a better quality of life. His ingenuity and hard work took the Roberts family out of poverty and provided us with some financial security – from which I have benefited and been able to build upon.

    I wonder if local cooperatives of skilled tradesmen should be encouraged, given support to buy a small plot and use their skills to build houses for the community, built by the community. As my grandfather always said, if every village in the country built a few houses on one small field, then there would be enough houses to go round. Just a thought.

    • rekrab

      In all fairness John, your simply applying the old guard here.What’s needed is grants to build homes, planning permission to build and a flow in the continuity of apprenticeships.
      Rather than the old tired way of one main contractor, lets have those co-operative values and funding from the government to the national lottery.

      Lets not follow old ways but have these homes in every community and once there built lets not attach mortgages nor rents but only services charges.Community homes, for community peoples that aren’t a stretch on housing benefits but free homes with applied services.

    • As someone with over 40 years experience in the building game your ‘local cooperatives’ proposal seems to be unworkable in detail. Often the only workers with a permanent presence on a building site are labourers – tradespeople come and go as and when their specific skills are required. This would make divvying up the rewards frightfully difficult, particularly on small scale/local projects.

      Wouldn’t the return of council direct labour departments be the best method of building houses by the community and for the community? Then directly employed tradespeople (invariably cheaper than private contractors – I was a private contractor so I should know!) can be deployed servicing existing stock when not engaged on new builds.

      • Dave, I defer to your expertise on this area (expertise I do not have). I would say that where there is a will there is a way. I don’t deny anyone the right to make a bit of money for themselves by unleashing some entrepeneurial zeal, it’s just sometimes people need help over the first hurdles.

    • Quiet_Sceptic

      Of course the modern fly in the ointment in your scenario is planning. You can still buy small plots of land for a few thousand pounds but today you probably wouldn’t get planning permission and a plot with planning permission would be out of the financial reach of a tradesman of modest means.

  • Brumanuensis

    I agree with what Jonathan writes, although I think we ought to be alert to the risk of creating another loophole in the tax code, even out of good intentions. That said, notwithstanding the undoubted industry and thriftiness of the Roberts family, I’m not sure if co-operatives would be able to build enough to meet housing needs.

    But yes, the economic principle behind LVT is very sound and attracts support from across the ideological spectrum.

    • hi mate- no doubt it wouldn’t provide for the full number of houses that need to be built, but I think it could at least contribute. I’ve always believed (perhaps from family history) that working yourself out of poverty and into prosperity provides more dignity than any State could possibly provide. I’m increasingly a fan of local co-ops, and I think British people are inherently entrepeneurial. Pooling local skills could be a win-win. We ease (some of) the housing shortage whilst offering working class tradesmen the chance to take control of their own futures. This is all off the top of my head stuff, but perhaps this is where the national investment bank can come in? Helping to fund these projects through loans etc to make such projects viable.

      • Brumanuensis

        Hi Jonathan, just to make it clear, I’m not against the idea by any means and I do think it would be a good investment for a potential future NIB. As a member of the Co-Op Party, I’m all in favour of expanding co-operative principles. My only concern, as I said above, is that it’s necessary but not sufficient. I do think tradesmen ‘learning on the job’ is an interesting idea, but I’d prefer it was coupled with a broad spectrum house-building programme, backed by old-fashioned statist shovel-work.

        Of course, the management of any properties built is another area where local co-ownership could come into its own. Certainly it would be a good way of expanding housing associations, and complementing traditional social housing.

  • well yes but you are being far too timid here, your £2 million cut off point is far too high, ideally it would be zero or £100,000 or something like that.

    And land is already registered – at HM Land Registry and for Council Tax and Business Rates purposes. This is a tired old Killer Argument which is complete bunkum.
    http://kaalvtn.blogspot.co.uk/2013/01/n-valuations-are-impossible.html#5

    It doesn’t matter whether it’s registered or not, you deliver the bill to the occupant and either he pays it or he hands it to his landlord, if it goes unpaid long enough, the land gets auctioned off to the highest bidder.

    But at least you made the point about allowing the “asset rich cash poor” oldies to defer, that’s that Killer Argument neatly dealt with.

  • Quiet_Sceptic

    It’s not a bad idea but it isn’t perfect.

    Depending on the level of tax set it provides some extra incentive for builders to use their plots with planning permission but it doesn’t address the issue of the general shortage of planning permission in some regions or locations.

    It does nothing to open up the housing building market to smaller developers, be they cooperatives or private. The power will still reside with the big builders who have the resources to buy up farm land and hold it for years or decades until it gets through our rather undemocratic and unaccountable ‘democratic planning process’ and onto the local development plan which transforms it into this highly valued building land.

    It’s good but on its own it isn’t a solution, you’ve got to bring planning into the mix.

  • jaime taurosangastre candelas

    Will this proposal not kill off agriculture in the UK, or at the very least make food much more expensive?

    The underlying report by CLASS does not go into detail, but from a little research, it seems there are 43 million (of 60 million total) acres in agricultural production, 3 million acres of towns, villages and cities, leaving only 14 million acres in some other use (golf courses, forestry, the Army training lands, uncultivated land eg in the wilds of Scotland, Wales etc where land is not economic to farm, lakes, etc). The total revenues of business rates and stamp duty are about £25 billion a year, and the report proposes replacing those taxes with this new Land Value Tax.

    The current total “land bank” held by various developers is estimated at 330,000 “plots”**. I do not know what size a plot is precisely, but I assume around 1/15 of an acre (ie the size of a tennis court). So, with this assumption, there are 22,000 acres in the total land bank.

    So, to raise £25 billion by land tax, the tax per acre would have to be:

    £478 per acre per year of all non urban land***, or…

    £1785 per acre per year of all non-urban and non-farmland, or….

    £1.136 million per acre per year of the land bank (i.e. about £75,000 per plot). That should encourage some quick building, but it cannot all probably be built at once, so taxes will accrue on those plots not yet built. If it takes an average of one year for all plots to be built, it might therefore add £75,000 to the cost of the new build houses.

    ** http://www.telegraph.co.uk/earth/hands-off-our-land/8763931/Hands-Off-Our-Land-the-300000-new-homes-already-in-the-bank.html
    *** The tax bill for a mid size farm of 500 acres therefore being £290,000, which will drive farmers out of business.

    • jaime taurosangastre candelas

      A “down vote” on a set of simple calculations, demonstrably provable on non-controversial data, and asking a simple question on the sustainability of food supply in the UK? It is sometimes disappointing that these down votes happen without comment. You are left uncertain as to whether the logical premise is wrong or incomplete in context, or the political philosophy disagreed with for either good, bad or merely different reasons.

      • Hi Jaime, I share your concerns on the agricultural side especially. Although to be fair to CLASS they did specifically highlight the need to ensure farmers were not unduly affected (the devil is in the detail of course. Personally I would think farmers would need certain exemptions from this).

    • It’s called Land VALUE Tax because it relates to land VALUE, not simply acreage. The site-only rental value for a the bulk of UK residential plots is between £3,000 and £11,000 per annum (there are some where it’s £nil and some where it’s £1 million). The land rental value of a typical UK farm is about £10,000 a year (depending how big and what quality land). So the tax on a typical UK farm would only be a couple of grand more than on an average house.
      It’s funny how we used to manage for centuries with Agricultural Rates and Domestic Rates, which between them raised a heck of a lot more than Council Tax.

    • Derek R

      Except that it’s not a tax “per acre”. It’s a tax “per pound value”. That’s why it’s called a land VALUE tax instead of a land AREA tax. To calculate the tax on a mid-size farm you need to look at its value not its acreage. A hill farm of 500 acres will have a much lower value and hence a much lower tax bill than a lowland farm of 500 acres which in turn will have a far lower tax bill than 500 acres of central Glasgow which in turn will have a far lower tax bill than 500 acres of central London.

      I would imagine that that is why you got a downvote You need to redo your calculations on the basis of the proposal rather than something else.

  • jaime taurosangastre candelas

    And if a bill is handed to the landlord, what do you expect the landlord will do? I suspect that the landlord will merely increase the rent, so the tenant will effectively pay the tax, and if the tenant refuses to pay it, he will be evicted.

    This is possibly the big problem with the land value tax. Landlords will pass it on, farmers will increase the prices of food to pay their tax bills or stop farming altogether, and the result will be that the LVT is paid by tenants or poor people in their daily pint of milk being twice the price.

    • Ah here we go again, the tired old killer arguments…

      Landlords cannot “just increase the rent”

      http://kaalvtn.blogspot.co.uk/2013/01/g-lvt-would-benefit-rich-and-hurt-poor.html#1

      Only people who don’t know how low the rental value of farmland is worry about farmers.

      http://kaalvtn.blogspot.co.uk/2013/01/r-farmers-will-all-go-bankrupt.html

      Finally, the tax cannot be “passed on”. The landlord cannot pass it on in higher rents, a business (or farmer) cannot pass it on in higher prices. The rental value itself represents the maximum that can be “passed on”. There is nothing magical about rents. they are the maximum price a landowner can charge for nothing in return.

      http://kaalvtn.blogspot.co.uk/2013/01/q-businesses-will-go-bankrupt.html#4

    • Derek R

      What? A landlord who isn’t already charging his tenant the maximum that the market will bear? Where does this philanthropist live because I’d like to rent a house from him?

      Seriously, a landlord can’t charge more than the market will bear other wise he will find himself without a tenant to pass the costs on. I know this to be true because I am a landlord with a tenant whose rent barely covers the taxes and certainly doesn’t cover the maintenance costs, never mind the cost of capital invested in the house. But I can’t increase the rent because the tenant would leave for somewhere that didn’t overcharge and I wouldn’t get another one until I reduced the rent back to the market level.

      If only it was as easy as just totalling up all the costs and then passing them on to the tenant! Sadly (or fortunately depending upon your point of view) the world doesn’t work that way. Try it and you will soon find yourself without a tenant.

  • JC

    I don’t understand why the comparison with the Jubilee line extension is used with the increase of the value of that land when there’s no intention to tax it. The author states that primary residences with a value below £2M would not be affected. Where’s the money?

  • jaime taurosangastre candelas

    Your arguments make little practical sense. They possibly do on a whiteboard, but not in the real sense.

    (You have posted a reply above that I can see, but because it is awaiting moderation, I cannot directly respond to)

    This is not “wooden dollars” or pretend money, this is a real cost. What Andy Hull (although not you) proposes is that £25 billion of real money is stopped being collected from business rates and stamp duty, and is instead collected from LVT.

    If you pile on £25 billion in real LVT cost, do you not expect it to be passed on, either in rents or increased costs? The alternative is that it is not passed on, and people go out of business when faced with tax demands they did not previously have.

    Whatever way you look at it, £25 billion (a finite but real amount of money) divided by 60 million acres (a finite amount of land) = £415 per acre. Whether some acres are £nil values and some £million values, it nets out at that figure. The land rental values you point to in your answer and your blog site do not really address that “thorny” issue.

    Let us put it into the real world. My father in law farms (dairy) about 517 acres in Devonshire. He rents out about 15 acres to a livery yard (the daughter of his head cowman), and rents from me 8 acres that I bought from him on which we have some planning permission for 22 big houses (which cost me in 2004 about £17,000 in legal and architect fees to get arranged, and another £9,000 in 2009 to have “extended” in duration, and no doubt a similar amount next year). But he has no intention of renting his farm to anyone else, so the rentable value is zero. But, the Tiverton council would quite like to buy some of his farm, possibly all of it for building an extension of the town, so there is some market demand for his land. But, he has a long-term contract with the dairy in Wincanton for the milk from his cows, so he cannot sell his land (nor would wish to).

    What he actually does is produce milk, which British people want. How do you propose to establish the value of his land?

    • 1. Well, Adam Smith and all serious economists after him said that a tax on the rental value of land cannot be passed on. Do you really know better?

      2. If you replace Business Rates and Council Tax with a different tax on land and buildings, why does that make much difference? We used to have Agricultural and Domestic Rates in this country, you know.

      3. Your calculations per acre are completely out of whack. Are you aware that the most expensive bits of land in London are worth a million times as much as the cheapest farmland? Do you realise the rental value of a typical farm is much the same as the rental value of a typical UK house, and so the tax would be the same on both.

      4. And as you have said, the LVT would be a replacement tax, so the LVT payable by a farmer would be a few thousand quid a year and probably very similar in amount to what he used to pay in Council Tax on his farmhouse and Business Rates on his farm buildings.

      5. LVT is based on optimum permitted use. If your father neither has nor wants planning permission, then it is taxed as farmland. If you have actually applied for and received planning permission, then that is its optimum permitted use and you would be taxed accordingly.

      6. if you genuinely believed that landowners can merrily pass on the tax, why are you so worried? You’ll just be able to sell your houses for a higher amount?

      Unlike you I have heard all this silly arguments before and I have taken them very seriously and looked into everything in enormous depth and established that LVT is by far and away the best kind of tax. Whatever niggles there may be, they are as nought compared to the deadweight costs and economic damage caused by all the taxes on earnings and output.

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  • LizJustice

    I despair. People who live in a neighbourhood where through development outside their control, when their property and land prices rise so do the costs of living there. Put simply the price may go up but it doesn’t mean your have any more money to pay, can get a mortgage for anything else or you want to leave your home. Not everyone is rich who lives in a valuable property and selling up diminishes your home into an asset when that is simply not true for most people. Ordinary people do not hide behind ideals and the Labour Party need to listen rather than find ever cleverer ways to take what isn’t theirs and give it to the people who have earned no less money than the rest of us.

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