The Introduction of a New Land Tax - Planning Gains Supplement (PGS)
Introduction
The Barker review of housing supply identified the need for government to act to increase the supply of housing in the UK. Current constrained housing stocks have been responsible for consistent steep rises in house prices over the past 30 years, leading to a serious problem of affordability for many people in this country.
The Government has indicated that changes must be made to resolve this problem and that more land must be made available for development in the years to come. This in itself however raises problems for sustainability, expanding communities requires further infrastructure investment to match the development, for areas such as healthcare, schools and transport links. This government sees the need to address the shortfall and as such have produced a consultation paper on the Planning Gain Supplement (PGS).
As part of a package of reform the Government aims to change the planning system to help meet its sustainable development objectives, but in doing so it also needs to capture some of the gains that it is itself creating in doing so, the answer to this, it is suggested, is to bring in a new tax measure in the form of PGS, a case which was made by the Barker review alongside increasing housing supply. Simply put, the more land that the government releases for development, the greater potential there is to capture a percentage of the gains (or uplift) to landowners and / or developers.
Process and charges:
The government would need to gather data on the value of land in the numerous local authorities’ areas, and then assign a rate of tax to that value. This data could come from actual transactions recorded by the land registry or from valuation estimates from the Valuation Office Agency.
The aim would not be to set tax so high as to discourage development, indeed if it were to do this then many smaller private developers may be forced from the market, and hence the government’s bid to fulfill the housing demands would not be in anyway aided by such a move.
The tax should however be high enough so as to cover the gains currently due under section 106 – developer contributions, overall the aim is to provide subsequent resources to local communities to support the growth in the housing stock and subsequently the infrastructure needs of enlarged communities. It is clear that with an aging population and longer, healthier lives being expected that the housing shortage must be addressed, but the government believe that it can not approach this issue of such significance without the extra revenue from a tax measure such as the proposed Planning Gains Supplement.
The government may provide a lower rate of tax for developments on Brownfield sites, or on sites which warrant investment due to housing growth initiatives or where there could be other environmental or indeed social costs apparent.
It is important to note that a proportion of the revenue from the proposed PGS would be directly attributed to the finances of the local authority in whose area the planning consent was granted. Thus to a certain extent the local community and infrastructure would benefit from extra finance related directly to developments being granted in the locality.
Implementation:
The PGS will not come into force before the year 2008, and even then it is considered that there shall be a staggered or phased approach to its introduction, to allow developers and landowners who committed to land acquisition contracts prior to the levying of the tax, or those who hold large land banks (without planning consents in place) to exercise their business operations under similar conditions as the time at which they acquired or agreed to purchase the land. Similarly to aid developer cash flow the government propose that the developer would not be required to pay their contributions until such time as they issued a development start notification which would then require them to submit a return (on a self assessment type basis). Therefore commencing development without making this notification to the HMRC and submitting the subsequent return would render the development commenced illegally. There are various enforcement alternatives for the proposed tax currently on the table.
There are a variety of complex issues and questions which still need to be considered and addressed by the government, such as that of the developer who enters into a land purchase contract which contains an overage clause based on a ceiling resale value of the property(ies) to be resold. These clauses will without doubt have to take into consideration the PSG tax, however, where many contracts will be well drafted in this respect it is considered that many will fail to approach this important issue appropriately leaving individuals and / or organisations in potentially troublesome positions from a legal standpoint.
But hasn’t this all been tried before by previous governments?
There have been a number of development gains taxes (DGT) imposed in the past, but with them came high rates of tax, which in fact introduced disincentives to development and wide spread avoidance. The government is keen in this instance not to repeat this mistake and wishes to promote development, whilst supporting sustainable growth and investment back into local communities. They are also keen to fend off tax avoidance, particularly of the offshore corporate / investment structuring type, recent provisions in the budget have closed loopholes for offshore investment trusts, many of which held property; it would seem that a similar approach will be taken to safeguard the avoidance of the PSG.
The calculation of the Planning Gain Supplement:
There are a number of components which would give rise to the liability for the chargeable person, they are:
- Planning Value (PU): The market value of the property immediately after a full planning consent is given
- Current Use Value (CUV): This relates to the market value of the property before the planning consent is given by the local authority.
- PGS Tax Rate: The rate of tax set by the government on land gains through planning
The calculation to ascertain the amount due to the HMRC by the chargeable person is therefore worked out with the following equation:
Uplift = Planning Value – Current Use Value
PGS liability = Uplift x PGS Tax Rate
So if a plot of land was worth £300,000 before planning and £400,000 after full planning approval, the uplift would be to the order of £100,000. If for example’s sake the government then chose to set the PGS rate of tax at 5% (please note this is not an official figure) then the PGS liability to the developer upon a development start notice being filed would be £5,000.
The methodology by which valuations are proposed to be made (average valuations or actual valuations) is still the subject of much debate amongst other issues of significance; the one fact that is clear is that this new gains tax will encounter wide ranging opposition to its introduction and value, as well as undoubted supporters to suit.
