'Putting land to work: the role of a 'land-swap levy'
10th January 2005
Tax has to generate general revenue for the government: but there is an increasing role for taxes that both collect income and serve an additional purpose at the same time: green taxes, which tax environmental 'bads' and promote environmental 'goods' at the same time are an example. Taxes are also increasingly seen to have an 'acceptability' premium: if something is seen to be happening with the tax collected which is, perhaps related to its imposition, then it gains greatly in support and legitimacy. Road tolls that fund alternative transport come to mind. The proposal in this paper, of a 'land swap levy' which takes an element of 'hope value' from the uplift gained from change of land use in rural areas and sets it to work on the long term affordable development of rural housing fits both these tax descriptions. It is, it is hoped timely: much consideration has been given over the years, and more recently with the Barker Report on Housing Supply, to how a 'betterment levy' on land might work; and similarly much has been published on the problems of rural housing and how the 'crisis' might be addressed.
It is almost a commonplace to state that there is a crisis in affordable rural housing. Most of the indicators that conspire to place pressure on housing across the country - increasing age, greater formulation of single person households, increase in land costs relative to the buildings on them - are magnified in rural areas by the immobility of the population, the distances between settlements, and the planning restrictions which increasingly seek to defend the green fields of the countryside against incursion from the developments of the town.
There is a crisis for these reasons in rented rural housing. Only 15% of households in rural areas are accommodated in social rented housing of any kind: product of a combination of policies and events, ranging from the dominance of rural areas by councils not inclined to build social housing, the sale at large discounts of relatively attractive council sector housing not blighted by being on sink estates or on the
twelfth floor of a tower block, and by the urban emphasis of subsequent social housing reinvestment programmes through such bodies as the Housing Corporation.
But there is an equal crisis in access to affordable housing that can be purchased by first time buyers or low income rural residents. As rural house prices have risen, and particularly so in the south of England, the possibility for such households being able to get onto the first rung of home ownership has become more and more distant for many. Indeed a far higher proportion of young people continue to live at home with their parents beyond 21 than is the case in urban areas, and recent figures suggest that some 40% of new households cannot afford housing available to them for sale on the open market, or indeed, often to rent at market rates. A study of young people by Rugg and Jones (2000) found that virtually all those who moved out of parental homes in rural areas after the age of 21 could only do so by moving to urban areas, and that of 60 twenty-two year olds they interviewed, only two had achieved any sort of independence whilst remaining living in rural areas.1
This is not to say the crisis remains unaddressed. There have been a number of initiatives over recent years to come up with some sort of strategy to address affordability. The Rural White Paper (2003) set out a number of proposed measures by and large not requiring legislation, and many of these have now been put into place. Local Authorities are now required to make assessments of rural housing need and the Housing Corporation has doubled its support for building dwellings (800 to 1600) in settlements of under 3000 and has substantially enhanced building of affordable rented housing in market towns. More indirect measures, such as giving local authorities authority to end council tax discount on second homes, and in selected areas, restricting the right to buy council houses will also have an effect.
Government has confirmed that the rural exceptions policy, which enables local authorities to designate small sites for limited housing development where they might otherwise be restricted by green belt or agricultural designation where shortages of affordable housing could be demonstrated, will be maintained, alongside a new policy to be outlined in policy guidance to enable local authorities to designate sites for affordable housing only.2 There are even moves, yet to be tested fully from a legal standpoint, for homes in national parks to be made available for sale to local residents at a different rate from that charged to outsiders3, a move that echoes the system in operation for many years in the channel Islands, and which has resulted in the access price for housing for outsides to rise to many times that of the 'domestic' market.
Even so, and with the exception of dubiously legal 'local market' schemes, proposals and programmes currently suffer from a central problem - that of how the properties built as 'affordable' can remain affordable over a period of time - the so-called 'stair casing effect'. The price pressures of rural housing soon 'right' the discounted elements of affordable housing once it is sold to the second occupant, and the relatively rare rented private sector rents tend to inflate beyond affordability for the same reason.
Renting through a registered social landlord is, of a course a way to combat rental affordability, at least in part, but as has been suggested the numbers of houses built by RSLs in rural areas remains low, and suffers as a result of the urban tilt of Housing Corporation funds. In any event, unless RSLs can find discounted land on which to build, the unit cost of each dwelling - and therefore the rent - remains high, and produces relatively small numbers of houses for the sums allocated to RSLs by the Housing Corporation. Prices of land in small market towns and smaller communities continues to climb in part because of the restrictive planning policies regulating the building of new homes outside the already built up-footprint' of the community, and most land in such footprints goes for the development of the more 'luxury' end of the market, and RSLs in general find competing for the bidding where such sites are concerned a generally unrewarding prospect.
The rural 'exceptions' policy, set out in PPG3 and announced as being retained in its updating and revision, enables local planning authorities to grant permission for affordable housing on small sites which otherwise would not be released for housing in the local plan. The introduction of an 'exceptions' policy has to pass the test of a demonstrable need for affordable housing in a particular area, and does take a substantial element of the value of the land concerned out of the equation, in that land designated for 'exception' development will experience a rise from its previous agricultural value, but only to the limited extent that the operation of a restricted negotiation allows. The Planning authority will often have a RSL 'in tow' when the exception is agreed, and therefore the price reflects the fact that, without the exception and the RSL, the land would receive no uplift at all.
The 'exceptions' policy is estimated to add some 1500 affordable homes - rented, built for sale, or part-buy - over and above what local authorities might otherwise produce by way of affordable housing: but the sale elements of exception schemes do of course suffer the same fate as affordable housing for sale obtained by planning agreements as a part of planning permission: the house and the land tends towards the value of the surrounding properties.
Unless, of course, the value is somehow frozen: and this is the claimed effect of land held in perpetuity by Community Land Trusts, a concept pioneered with some success in the USA and gaining currency in the UK. CLTs hold the land in trust separately from what is built on it: the bricks and mortar on the land can be bought and sold as can any other house, but remain leasehold on the trust land, and whilst rising in price, do so only as the value of the building and not the land inflates.
Community Land Trusts are, in principle, simple bodies and can exist in a number of permutations: the Trust, a charity, or perhaps an associated organisation of a Parish or Town Council can hold the land and has the initial task of negotiating with the builders of housing on the land: but other than that their tasks remain the occasional resolution of legal matters whilst buying selling, repairs and maintenance continues on the land without their specific intervention.
In reality, however, CLTs have made a negligible impact on rural housing4 for the straightforward reason that they do not have the money to purchase sites in the first place, even if they subsequently freeze the increased value within them. Unless sites are provided by philanthropic individuals, or local planning authorities make rural exception sites available to them at reduced prices, they remain in general the sort of Very Good Idea welcomed by many by practiced by very few.
Meanwhile, the bulk of new housing in rural areas occurs neither through the efforts of local authorities, land development trusts, exception sites or the development of parcels of land within communities. It takes place by the conversion of land previously designated for agricultural use into land with permission for building houses on. Most of the houses built on such sites are not for rent or for affordable purchase, and are built for profit by builders who have purchased the land from those who have engineered the change in value, or in many cases have partnered those owners by buying 'hope options' on land that might (or might not) gain such permission in future. Indeed a not insignificant industry now exists on the internet selling small parcels of land in fields without planning permission at prices well above the going rate for 'bulk' agricultural land: the 'hope' is, as it were, parcelled out to the advantage of the landowner and often to the disadvantage of the sometimes romantic purchaser who finds him or herself in possession of an inaccessible and largely valueless plot of land with a grazing horse on it.
Even with the tightening of planning policy to require sequential tests of the developability of brownfield land before Greenfield land can be developed, substantial amounts of land continue to be converted from agricultural values to development values each year. Just how much in terms of hectares can be seen by looking at DEFRA's 'digest of environmental statistic's According to the digest, some 5,305 hectares of land changed to residential use from other uses during 2001: of this total, some 35% comprised agricultural land or land with other rural uses - that is some 2000 hectares of land metamorphosing from a value of a few thousand pounds per hectare to land worth between on £1.2 million and £2.7 million per hectare (depending on where it is in the country) simply because it can be sold for development.6
This analysis, taken from the recent Barker Review of housing supply demonstrates very clearly just how enormous the gains now are - up to 300 times agricultural value - from the realisation of hope value into the real value of bulk land for new houses.
Barker suggests that there is strong case to recover an element of this pre-development 'windfall' for the exchequer in the form of a development levy, and she suggests that this should be done at the point 'of granting planning permission'. The tax, she says, would need to be levied on the basis of the gathering of information on land prices in various local authority areas, and procedure relatively straightforward to set out on paper, but probably rather more difficult to undertake in practice. Would the movement of prices have to be plotted by each local authority, and what volume of land movement would it be based on? She also suggests that 'a proportion of the revenue generated from the granting of planning permissions.should be given directly to local authorities' and that in general, the tax should provide 'additional resources to boost housing supply'7. Barker also notes that consequential amendment of section 106 arrangements would have to made by Government, but since, as has been noted almost all such development land does not carry any section 106 agreement on it, this is likely to be of marginal significance.
Barkers proposals when they were published, predictably met both with murmurs of approval and roars of outrage. Government, in the shape of the Chancellor of the Exchequer, seemed to contribute some strong murmurs of approval in principle.
The problem for Government, however, is how to move such a suggestion forward to the reality of legislation, and the consequence of implementation: for as Barker points out, we have been down this way on a number of previous occasions.
It is almost thirty years since the last attempt was made to capture some or all of the increase in land value arising from its allocation for development by planning authorities.8 The first attempt, contained in the 1947 Planning Act arose from the argument that in a strong post war planning system, additional value arose almost exclusively from the decisions of that planning system, and therefore it was reasonable to capture it for the state in its entirety. Would-be developers were required to pay over 100% of the difference between the original value of the land and its developed value, and perhaps unsurprisingly revenue from the tax proved far lower than anticipated because of the reluctance of landowners to bring land forward. The charge was abolished in 1954 after the Macmillan Government debated for some time whether a reduced levy (of 60%) would bring more land forward.
The second attempt, the 1967 Land Commission Act established a mechanism both to charge a betterment levy (of 40%) on the development of land as it was sold, and to authorise the pro-active purchase of land allocated for housing in local development plans. The Commission succeeded in purchasing substantial amounts of land by the time the incoming Heath Government wound the land commission up, but the complexity of the legislation on this occasion enabled considerable evasion to take place, and once again the revenue from the betterment levy proved disappointing.
The last attempt, through the Development Land Tax Act of 1976 fixed the betterment levy at 80%, and was envisaged as part of a more ambitious long-term programme to publicly own development land. The tax was also levied on land that was developed without being sold, and once again fell foul of over-complicated features enabling widespread avoidance schemes to flourish. Interestingly, Margaret Thatcher abolished the ambition to move to community land control by nullifying the Community Land Act, but kept the development land tax at a reduced rate of 60% until 1985, when the then Chancellor Nigel Lawson abolished it on the basis that the bureaucracy of collecting the tax cost a disproportionate amount, and that capital gains tax could do the job better. This assertion has proved ill-founded over the years since: Barker points out that, with roll-over relief, taper relief and the ability of landowners to offset other losses against tax, the revenue for CGT on land sales remains low, and probably well under £50 million.9
Whilst we will never know whether, in each instance, the operation of the tax over a longer period of time would have resulted in greater efficiency in operation of practical acceptance, it is certainly possible to conclude that the operation of a tax on each occasion suffered both form the level at which it was pitched and the complexity of the regime introduced to calculate liability and collect the result. Kate Barker herself, in an article published subsequent to her final report argued that any tax proposal should e assessed according to principles of fairness and simplicity. A tax should, she said
1 Be simple and certain
2 Be proportionate to the cost of administration
3 Be perceived as fair
4 Avoid significant adverse unintended consequences
5 Create minimal distortion of economic activity, except to correct a potential externality.10
The three attempts at introducing a betterment levy in various forms all fall at a number of Barkers hurdles for a variety of reasons, but so, it can be suggested does Barkers own proposal. It would, for example be potentially quite cumbersome and possibly legally difficult accurately to gather an appropriate tax amount for each site affected. According to Barker each planning authority would have to impose a tax based on reviews of developed land prices in their area - but the volume of sales, and the fluctuation of developed value over areas and time, makes this an inexact science. This would be complicated, inevitably, by the suggestion that different rates might apply for brownfield land, and in areas where there are particular housing growth strategies. Barkers very loose formulation of where the tax might go also looks potentially challengeable as 'unfair' in that the tax could be seen simply as a device to line the exchequers coffers, rather than as something that puts the value of land created by planning permission to work in ways apparent to local views, and particularly to the rural communities alongside which such land sits.
So would a land development tax be doomed to go the same way as its predecessors? Are there ways in which the principle of a levy could be harnessed to the resolution of the glaring and heartfelt disparity of a crisis in rural affordable housing whilst alongside the crisis, and in the same geographical space huge amounts of money continue to be made out of the simple expedient of converting agricultural land into land on which houses can be built albeit mostly on a non-affordable basis?
If we accept that, in principle, a levy at the point of planning permission is a sound device for harnessing value which could go towards the development of affordable housing, then ideally we would want to consider the most direct method of transferring the value that is represented by the realisation of hope into affordable land for housing. In theory, we would want ,as it were to transfer the agricultural value of some of the land as it stands before planning permission into land value on smaller sites in small town or rural communities, tying the agricultural value up in that land by a suitable device. This procedure, we might consider could be concluded before any post development permission - an attenuated section 106 agreement with a developer - is entered into.
This can be achieved by considering a levy on agricultural land at the point of planning permission not as a sum of money but as a portion of the land that is proposed for development. In this way no 'tax' would be levied, and there would be no requirement for a lengthy and possibly disputed system of valuation to be entered into. The land, as a parcel - perhaps twenty per cent of the land proposed for development - would be levied.
This, however, would not, except in a few cases, produce land on which affordable housing could be built in the right place - inside the urbanised footprint of small market towns or rural communities, and nor would the levy of a parcel of land maintain affordability after building had taken place.
The resolution of these two problems makes up the centrepiece of the 'land-swap levy'. In order to achieve planning permission, a landowner (or his agents) would be required to find, and purchase parcels of land totalling the same acreage as the levied land in his proposed development within the urban footprint of communities in the region in which his land sits. This land, it can be assumed would normally have a value representing that achieved by land in areas already zoned for housing. Thus a landowner might find four or five small parcels of land in different urban communities to equate to the size of the land levy on his proposed development. The purchase prices might vary to some extent, and this might, perhaps, act as an incentive to the landowner to pursue economical purchases, but since the object of the land swap levy is to swap land and not money, this is of no consequence otherwise. The landowner, once the purchases had been made and agreed, would then be free to develop the whole of his existing site, subject of course to any subsequent 106 agreements on infrastructure after development is set out in detail.
It would then be down to the destination of this purchased and 'swapped' land to ensure continuing affordability. The obvious repository for such land would be Community Land Trusts, which would ten have available to them what has eluded them so far, by and large, namely a continuous supply of small and manageable plots on which to develop, perhaps in association with Housing Associations. The land would, rather in the way that land and buildings are turned over to the National Trust at nil or a low consideration, be vested in Trusts for the future benefit and affordability of rural housing. It might be appropriate for the receiving trust to restore to the landowner the agricultural value of the land so swapped, but the result would be that land at agricultural prices would have entered the urban house building chain in urbanised communities in rural areas.
There is not a shortage of bodies able to introduce or manage Community Land Trusts, and the challenge to a rural community of setting trusts up, possibly with the assistance of the local Parish Council, would not be great. Indeed, the development of successful Community Land Trusts could play a powerful role in strengthening the cohesion of small towns and other rural communities, and the existence of land available to a would-be trust at agricultural prices would undoubtedly greatly speed the process. Houses on such sites would mostly be bought and sold in the normal way, or might be equity-share schemes such as that run by the Rural housing Trust- but they would become as housing developments straightforward elements of the dynamics of home ownership and occupation in rural communities, with the exception that they would continue to be affordable and preferentially available to local purchasers if trusts stipulated.
The effect of such a levy on rural affordable housing once fully working would be considerable. It is, of course difficult to calculate exactly what this would be, but we can gain some insight from DEFRAs published figures on land use in rural areas. (DEFRA Digest of Environmental statistics September 2003) According to DEFRA, in 2001, 32% of land changing to residential use was previously agricultural land, and therefore could be subject to the arrangements here described. This represents about 1700 of the 5305 hectares of land overall changing to residential use. If the 'tax foregone' route resulted in 20% of that land being 'swapped', then something like 340 hectares worth of land would be involved, enabling about 16000 permanently affordable rural houses to be constructed per year, close to or above the level of affordable housing estimated to be required by recent reports such as those by the countryside Agency and the CPRE.11
A number of objections to the bare outlines of a 'land-swap levy' spring to mind as detail begins to be filled in. Would landowners be able to find the money to buy sites if the completion of such purchases were a precondition of planning permission? Might there not be circumstances where in a particular region, a landowner simply could not find suitable sites to swap within a reasonable timescale? Would Local Planning Authorities fall out about whose land was being swapped and in which authority? What about brownfield sites that already had a value greater than that for agricultural land - would the same conditions apply? What about the existing 'excepted sites' arrangements - how would a 'land-swap levy' fit in to them?
Some of these are minor objections, others more serious. Greater brainpower than is possessed by the author could undoubtedly be harnessed to construct a detailed administrative procedure for such a levy, if the principle was accepted - and at first sight the detailed administration looks to be relatively straightforward, at least by comparison with the procedures that would need to be introduced if betterment levy in its full form were once again to be introduced. It would, of course have the merit that it would be difficult to evade, since the principle of the levy would revolve around tangible, measurable plots of land rather than more fluid concepts of what value applied when and whether fiscal devices to avoid paying might be set up.
Whether landowners would be able to find the money to purchase suitable sites is perhaps the most significant potential objection: landowners are often, in their own right asset-rich but cash poor. This situation, however, masks the reality of the commitments on large parcels of 'greenfield' land at the point of receiving planning permission: the land in many cases will have been 'optioned' by a developer, and it would not be unreasonable to source the funding for purchases from those with 'options' especially if all other matters have been resolved, and the only outstanding issue is the completion of the land swap. After all, since the tax is a land-swap, the nature of financial arrangements that facilitate the swap are not, unlike the passage of money in a tax levy, of any concern to those franking the agreed purchase of land. In some cases there might be a real cash-flow problem, and it could be possible to fund purchases through loans redeemable on the development of the main land parcel.
A more serious potential objection is raised by the prospect that in some areas, land fitting the bill for swapping is not available at the time of development application. The reality of this objection depends to a large extent on the definition adopted of the area within which a site search might be conducted. A restricted scheme, limiting the search to the local planning authority area within which the development sits could give rise to difficulties, but there seems no reasons in principle, why such restrictions should be enforced. The uplift value of a site is not , as it were the possession of a particular local planning authority, and a policy based on a regional search would obviate most difficulties of site search. This would not necessarily always overcome the claim that no sites were available, however, and the provision of the payment of a commuted sum to a Community Land Trust or to a stakeholder for a trust, in order that they could search for a site at a future date could be envisaged. This sum would not have to be based exactly on a valuation, since equity would be served by producing a suitable site: indeed, setting a commuted sum route at a relatively high price would serve to ensure that it acted as a last, rather than a first resort.
Kate Barker, in her final report, notes that the provision of a centrally levied tax on betterment would be seen by some planning authorities as taking away their expected 'windfalls' through subsequent negotiations on section 106 agreements, and the same criticism could be levied on the land swap levy proposal. The extent to which serious 'windfalls' arise from 106 agreements can be somewhat exaggerated, and in any event, moves are in train to codify what might be obtained through the introduction of some form of tariff system. This system would in commuted form, be applicable to a land swap levy regime, since the content of most 106 agreements on residential land concern the consequences of the planning permission (access roads, open spaces, community facilities etc.) rather than the uplift in value leading to it. Gain would still therefore be available to local planning authorities, and in aggregate a substantial additional gain in the form of affordable housing development rather than the crumbs from the table of a central tax would be available to a planning authority. It would, by the way not be beyond the reach of a pro-active planning authority to assist a developer with a local site search, or even the assembly of swap land so that the benefit of the swap is felt in the local area.
Barker also accepts that a cash levy would have to be targeted differentially on otherwise undeveloped brownfield land, and there is no reason why a similar 'variable regime should not apply to a land swap levy. Brownfield land for residential purposes in rural areas represents a relatively small proportion of available sites, and a variable arrangement would not significantly distort the overall effect of the proposal.
A final query hangs over the 'exceptions' policy, initially thought to be on its way out with the introduction of a new PPG3, but at the time of writing apparently in the process of being reprieved. The policy provokes contrasting views: parish and rural District Councils have argued that the continuation of the policy provides valuable flexibility in addressing the issue of affordability through the provision of sites for rented housing; others, such as the CPRE argue that over time the policy will distort rural communities by accepting development on inappropriate sites, and distort the credibility of the planning process by applying different rules to different sites. It may be that the success of a land swap policy in meeting most of the targets for affordable housing in rural areas could lead to the policy being superseded, and there should, of course be no question that developers might be able to discharge their site swap responsibilities by capturing and 'swapping' excepted ' sites. The non-immediately local nature of swaps dies, however suggest a continued localised role for an exceptions policy, and this would depend largely on the 'arguing space' that existed if land swaps did not over time generate usable sites in particular communities.
It is a tax that appears to fall foul of the principle in Government that 'it can't be done because it's not been done before', but the principle is quite as new to the Treasury as it might appear: 20% of the landfill levy conforms to the same principle: the tax never goes as far as the treasury and is, instead, put to work through trusts for community benefit.
In brief, therefore, a land swap levy would serve both as a decentralising force in housing as well as a highly targeted method of addressing the rural housing crisis. It is a 'tax' that is relatively simple to collect, transparent, has low administrative costs and will benefit, over time most rural communities without recourse to existing resources.
Notes.
1. See Shucksmith M. (2002) 'Social Exclusion in Rural Areas: a review of recent research' ODPM and more recently, Shelter (2004) 'Priced out: the cost of rural homes.
2. PPG3: Housing Annex B. See also ODPM press release 8. December 2004 'affordable homes for rural communities'.
3. Guardian 15th December 2004 'New Dales homes:only locals need apply'.
4. Small scale CLTs have, however made some impact in Scotland, and there are exceptions in England: the Rural Housing Trust, has for example overseen the construction and renting or equity-sharing of xxxx homes in xxxx locations, operating many of the principles inhere rent in the CLT model.
5. DEFRA 'Digest of Environmental statistics' September 2003. Table 4.
6. Barker K. Review of Housing Supply final report p.76. Table 4.1.
7. Ibid: p.87 Rec. 26
8. See Thomas W 'A review of development land taxes in Britain since 1947' in Bill (ed.) 'Building sustainable Communities- capturing land development value for the community' Smith Institute 2004 pp.7-19 for a detailed account of these measures.
9. Barker K. Op.Cit p.74.
10. Barker K. 'The political and economic case for a planning gain supplement' in Bill (ed.) Op.cit. p.21.
11. The CPRE report' Housing the nation' (November 2004) suggests 17,000 affordable rural homes are required each year: the Countryside Agency 'Briefing note on affordable Housing' no.11 September 2003 suggests 10,000 per year are needed for the next ten years.