Oxford Brookes University, UK a century of unsuccessful attempts at value capture? An analysis of the uk’s track record Richard Grover Oxford Brookes University, UK rgrover@brookes.ac.uk

Value capture: the theory Land is the “original and indestructible element of the soil” Landlords cannot alter its supply. Since it cost them nothing to supply, they will accept any price that is offered for land. The price of land is determined by demand. Population growth, urbanisation, economic growth increase the price of land Landlords reap the benefit of forces to which they have contributed nothing. It is legitimate to tax unearned increases in the value of land to benefit the community that created them.

Ricardo’s dilemma Two meanings of “rent” Rent (technical): The reward claimed for the use of land, the original and indestructible element in the soil – the “economic rent”. Taxing rent does not affect the supply of land. Rent (colloquial): The amount paid by a tenant to the landlord for the right to use a property for a period of time. Includes payment for the land but also fixed capital supplied by the landlord eg buildings, drainage. Is it possible to tax land without also taxing capital and discouraging investment?

Finance Act (1909-10), 1910: the “people’s budget” Tax of 20% on the increase in the incremental value of land payable on its transfer, sale or lease, or on the death of the owner, or every fifteen years in the case of corporate or unincorporated bodies; Tax at 0.21% on the capital value of unimproved land on which building was held back for speculative purposes Tax on open market value of mineral reserves of 0.21% Duty of 10% on the benefit to the lessor at the termination of the lease.

A radical budget with far-reaching constitutional consequences Introduced by Liberal Government Also included increases in income tax for those with high incomes and taxes on luxury goods Influenced by ideas of Henry George - taxation of unearned increase in land values Strongly opposed by Conservative Party who had a majority in the unelected House of Lords (upper chamber of Parliament) Legislation only passed after constitutional crisis and reduction in powers of House of Lords

Organisation of valuation process No system of land registration or cadastre Made use of Valuation Office which ad been created for assessment of death duties Recruitment of professional valuers – Fellows of the Surveyors’ Institution – on temporary basis to carry out valuations Use of Ordnance Survey maps at 1:2,500 to identify parcels Use of local income tax and parochial rates assessors to identify properties and their owners Use of survey (Form 4) – mandatory for owners to complete on penalty of fine – details of properties, lease terms, sale prices Form 4 enabled database to be compiled with current values from properties with recent transactions to be applied to comparable properties

Problems encountered Fiscal cadastre had to be created from scratch though active property market and adequate valuation capacity High start-up costs so tax was in deficit during early years Legal complications eg key terms like “transfer on sale” not defined or tested through case law Valuation problems with valuers disregarding unworkable complex legal rules in favour of using concepts with which they were familiar Issue of treating disposals of interests subordinate to freehold as partial disposals Political opposition resulting in abolition of tax in 1920 by Conservative Government

Town and country planning act, 1947 Implementation of Uthwatt Report (1942) on Compensation and Betterment – concerned about how reconstruction could take place with fragmented ownership and inequity of some owners benefitting from betterment Introduced by Labour Government committed to economic planning – physical planning with local development plans Development levy on increases in value of land Central Land Board to acquire land compulsorily to speed up development Expropriated development rights - future expropriation at existing use rights value and not highest and best use. Owners must seek consent for development from local planning authority

The impact Development levy and Central Land Board abolished by Conservative Government in 1953 System of planning consent remains cornerstone of modern town and country planning system – community can block development – impediment to housing and infrastructure development Market value restored as basis of compensation for expropriation in 1959 No compensation when owners denied development permission but no betterment tax when this is granted

Land Commission, 1967 Intended by Labour Government to secure gains from increase in development value “created by the community” for the community Land Commission with compulsory purchase powers Compensation at current use value plus a share of development profits ie market value less development levy Development levy at 40% where land not purchased by Commission Tax when development value realised eg sale, but no profits or capital gains tax payable Abolished 1971 by Conservative Government

Problems No shortage of capacity – plenty of professional valuers and data about market prices Cost of levy was high 12.5% of sum collected in year 2 Developers held back land from development Complex legislation and legal concepts – never fully implemented Opposition from local authorities to a national Land Commission Opposition from development and construction industry - Conservative Party repealed legislation after coming to power in 1970

Community land act 1975 & development land tax 1976 Labour back in power enacts “Land Commission” Mark 2. Central guidance and approval, but compulsory purchase by local authorities. Conservatives abolish it in 1979. Local authorities to borrow to buy land for development – 30% of surplus to the local authority, 30% into a pool, 40% to central government. Small developments exempt from development levy Development levy of 80% of difference between disposal proceeds and base value Very complex legislation – 94 pages of explanatory notes Duplicated capital gains tax – levy abolished 1985

Community Land Act Legacy Localised “Land Commissions” have proved to be successful in achieving precisely defined tasks eg London Docklands Development Corporation, Olympic Delivery Authority Powers of compulsory purchase – clean up contaminated sites – secure infrastructure - make them available for development

Planning obligations and community infrastructure levy Section 106 Town and Country Planning Act 1990 permits planning obligations to recover additional costs to community or loss of amenity from development – issue of whether local authorities have negotiating capacity to deal with commercial developers 2005 Circular imposed constraints – must be necessary and directly relevant to the development – not a betterment levy Planning Act 2008 - Community Infrastructure Levy – charge to support infrastructure required for development Advantage: can support a wider range of infrastructure. Disadvantage: flat rate per unit so unrelated to ability to pay.

Why value capture has had a chequered history in UK 1. Absence of political consensus. A government of one party introduces a measure – another abolishes it. Conservative Party has been opposed to value capture 2. Require complex legislation – lengthy, difficult, with plenty of scope for litigation. No shortage of valuers or data about market values but problems in specifying what is to be taxed. 3. Other less contentious taxes have been able to tax increases in value: Non-domestic rates (recurrent annual property tax) revalued every 5 years Stamp duty (property transfer tax) Capital gains tax on difference between acquisition and disposal values.