Having argued that There would be too much new construction, Home-Owner-Ists are prefectly capable of changing tack completely and claiming, again on the basis of no evidence whatsoever, that with LVT, there would be less new construction and that buildings would fall into disrepair.
• It's like the Window Tax - a disincentive to improvements (skip to article)
• People will wreck or abandon buildings to avoid the tax (Business Rates) (skip to article)
• It will impede transactions (like Stamp Duty Land Tax, capital gains tax) (skip to article)
• Land taxes just don't work (Land Development Tax, s106 Agreements) (skip to article)
• What if a developer has paid out under a s106 Agreement? (skip to article)
• Owners will have no spare cash to pay for improvements (skip to article)
• Construction companies will either go out of business or pass on the tax as higher selling prices (skip to article)
As pointed out in the previous section (J. There would be too much new construction) "... with LVT, there would be far less need for new construction. Instead, more incremental steps would be taken to make best use of what we've already got - loft extensions, refurbishment, conversions, small scale developments, infill projects, replacing derelict buildings, building on vacant/under-used urban sites etc. Most importantly, some widows in large family homes would downsize so that young families can upsize. In 2011, the Intergenerational Foundation calculated that there were 25 million unoccupied bedrooms in the UK, i.e. about ten million homes' worth of bedrooms. All of this is great news for small, local builders and craftsmen, and will go down like a cup of cold sick with national land bankers like Taylor Wimpey, Redrow, Barratts et al."
When challenged on such contradictions, most Homeys will usually just ignore you, but the more inventive will do DoubleThink and say "Aha, you think you're so clever you LVTers, you think that it will increase the amount of development [which is not correct and is a secondary issue], but you are wrong, this is the wrong way to go about it, and actually if you want more development you should reduce taxes on land owners."
Which again throws up the contradiction that the Homeys want less new development as well as lower taxes on land. So why are they calling for the latter (which they do want) if they really believed it would lead to the former (which they don't want)? The only way to square this is to assume that they know perfectly well that lower taxes on land and subsidies thereto reduce the amount of new development, which is a win-win as far as they are concerned. Not that they'd ever admit it.
The fact is, by and large, LVT encourages incremental improvements and is neutral on new construction. Planning laws (or absences thereof) will still be the main factor.
The easiest way to explain why all these assumptions are wrong is to see LVT as a kind of 100% interest-only, non-repayable loan from the government to buy land, secured on the land and buildings only with no recourse to the borrower himself if there is negative equity. Once you grasp that, all the other objections melt away.
1. The six taxes mentioned - Window Tax, Business Rates, SDLT, CGT, Community Infrastructure Levy and s106 agreements - are not LVT, so their impact is quite different
a) The Window Tax was a tax on windows, so clearly, the number of windows went down. It did not change the amount of land available or the value thereof.
b) Derelict buildings are exempt from Business Rates, so if you have no plans to rent out or improve your buildings, you are inventivised to let them fall derelict, often with a helping hand. If there were no such exemption, there would be no such incentive, and if the Rates were calculated on the rental value of the site alone (and not the buildings as well) there would be less disincentive to maintain and improve buildings.
c) SDLT and Capital Gains Tax are transaction taxes, they depress the number of transactions. Planning fees, the Community Infrastructure Levy and s165 agreements are taxes on (new) construction, so depress the amount of new construction.
d) All these taxes would be the among the first to be replaced by LVT, which tends to encourage optimum use of sites, be that actually using the existing building, selling it to somebody else or building on it.
1b. "What if a developer has paid out under a s106 Agreement?"
See Wiki for a brief explanation of s106 Town & Country Planning Act 1990.
If in doubt, apply common sense. If a developer has paid cash or paid for specified expenditure not directly related to works on the site itself, that is to all intents and purposes a prepayment of LVT. If the developer of a site has incurred such expenditure in the past and still owns the site, then the value would be amortised over (say) thirty years from the year of payment, and the developer/owner of the site gets a credit/deduction of 1/30 of the amount for the remainder of the thirty years.
For example, it is 2017 and a developer paid £300,000 (planning fees, SDLT, CIl and so on) in 20073, that gives an annual credit/deduction of £10,000 for the years 2003 to 2033. The first ten years have been used up and so for the next twenty years, the developer gets a £10,000 credit/deduction.
2. "Owners will have no spare cash to pay for improvements"
Nonsense on at least four levels:
a) If you are buying a building and it is in disrepair, you get the discount when you buy it which compensates you for the cost and hassle of doing it up once you've bought it.
b) If you buy the building with an mortgage, that is no disincentive to keeping it in good condition. LVT is like an interest-only, non-redeemable, non-recourse mortgage, so is no disincentive to keeping it in good condition.
c) The cost of maintenance and improvements includes a large element of VAT (and income tax, unless you do cash in hand) and those costs have to be paid out of your net earned income. If your net earned income is higher, VAT is gone and the tax which your builders have to include in the price to leave them with enough to live on is lower, then the overall affordability of maintenance and improvements improves dramatically. In real terms, the number of hours of paid work you need to do to earn the money pay for any particular job will fall by at least a third.
d) By and large, people would rather live in a home in good condition. If you over-occupy, so that your earned income isn't enough to pay for the LVT (or interest on the interest-only loan) and the improvements, then you are in the wrong house. You can just trade down to somewhere you can afford, and somebody else willing and able to pay the tax will buy it from you. That's quite different to current rules, where people hang on to houses which are becoming increasingly dilapidated because there is no obvious holding cost.
3. " Construction companies will either go out of business or pass on the tax as higher selling prices"
Caroline Lucas was harangued by somebody from the Home Builders Federation (or similar) on the radio, who claimed that Land Value Tax would make building new homes unviable.
She didn't actually rebut this with the obvious point, so here it is:
Residual valuation is the process of valuing land with development potential.
The sum of money available for the purchase of land can be calculated from the value of the completed development minus the costs of development (including profit).
The complexity lies in the calculation of inflation, finance terms, interest and cash flow against a programme time frame.
Please note - it is quite clear that the developer's costs do not push the selling price of the finished building up, that is fixed; the developer's costs push the purchase price of the land down!
Here's a real life example:
OVer ten years ago, I advised a company which was selling an acre of semi-derelict land in north London, they were unsure how much they'd get for it. Somebody from a larger homebuilder told me - blurted out in a meeting, really - that when they were buying land in that area, they'd pay up to £50,000 for each flat that they could build on it (it would be double that now).
In round figures, each flat could be rented out for £7,000 a year, less costs = £6,000; they could be sold for £120,000; the pure build costs per flat were £50,000; and the developer expected a profit/contingency per flat of £20,000.
That leaves £50,000 which the landowner gets under the "residual valuation" method. The developer has to finance that purchase somehow, so he ends up paying £3,000 or £4,000 a year in interest to his own financiers (bank, bond holders etc) for the duration of the build
Now, what if the developer knows that for the duration of the build, he is going to have to pay full-on LVT for each flat/equivalent of £4,000 (net rent £6,000 less bricks and mortar allowance of 4% x £50,000)?
1. Let us assume that the shift to LVT pushes down the selling price of the flat to £80,000.
2. The builder will simply stick that into his calculations, deduct the £50,000 build costs, the £20,000 profit margin/contingency (the tax due on these elements would be much lower, so the £50,000 and required £20,000 would be lower, but by an unknown amount) and the £4,000 LVT he would have to pay (assuming project takes a year to complete) and offers (say) £6,000 per plot.
3. The developer's profits are entirely unaffected. And as it happens, the £4,000 LVT he has to pay is a straight swap for the £3,000 or £4,000 interest he would have had to pay to finance the purchase of the land under current rules.
4. The landowner has to accept the offer of £6,000 per flat; his alternative is paying [£4,000 x number of flats] each year for the privilege of owning a derelict site. In theory, there might be a flood of landowners literally giving away their brownfield sites.
5. Clearly, there will be marginal situations where the theoretical land value dips below zero (the finished selling price might be lower than £80,000 or the project might take much longer); so even if the developer is given the land for free, his profit margin of £20,000 will be so eroded that it's not worth the hassle.
6. In that case, if the council wants the development to go ahead, it can simply waive the LVT for the duration of the build, or for the next one or two years (or whatever), pushing our developer back into the black. That will just be part of the usual negotiations and haggling between the developer and the planning department/local council (the LVT exemption is like a Section 106 payment, but in the other direction).