The Valuation Office Agency already have records of all commercial land and buildings for Business Rates purposes, so that requires minor tweaks only, in this section I will outline how residential land could/should be valued.
• The total tax base for UK residential land (skip to article)
• What do we mean by "land-only rental value" or "site premium"? (skip to article)
• Using recent selling prices as a guide to rental values (skip to article)
• Adapting the Council Tax system (skip to article)
• Banding (skip to article)
• Appeals (skip to article)
• Revaluations (skip to article)
1. Estimating the total tax base for UK residential land.
People are more familiar with selling prices than with rental values, so let's start with Savills' January 2015 summary to set the scene:
Their total number of units in England & Wales agrees to the total number of homes for which a Council Tax valuation exists.
We can then replace selling prices with average rents from Homelet's December 2014 survey, adjust those rents for the fact that rented homes are on average 10% smaller/cheaper than owner-occupied homes; add on 10% for Council Tax and multiply up again by the number of units, to give us the total rental value:
To arrive at the land-only rental value, all we have to do is deduct an estimated £4,000 for the annual running costs of each home (repairs, insurance, amortisation/cost of capital for bricks and mortar etc) and that's the land-only rental value of a nice round £200 billion:
We could at this stage simply say, as at January 2015, the current land-only rental value of £200 billion is 3.5% of the total value of all housing, so the land-only rental value of each home will be +/- 3.5% of its selling price, and, subject to a few caveats as explained below, this is surprisingly accurate.
1. The headline figures for the three main house price indices (Nationwide, Halifax and HM Land Registry) of (currently £188,000; £189,000 and £177,000) are not simple mathematical averages, the first two are based on a historic hypothetical figure indexed up for price changes and HM Land Registry is based on the geometric mean rather than the simply mathematical average. To cut a long story short, their headline figures are much lower than the true average.
2. Savills' average value for England & Wales of £216,000 is one-sixth lower than a simple average of all prices paid in England & Wales reported by HM Land Registry in the calendar year 2014. If the average land-only rental value is 3.5% of Savills' lower figure then it is only 2.9% of the higher average price paid according to HM Land Registry.
2. "Land-only rental" value or "site premium".
In an ideal world, Land Value Tax is based on the land-only element of the rental value of each plot. The nay-sayers hit back by saying that if you have a plot of land with no building on it, its rental value will be negligible, which is why I refer to the "site premium". i.e. physically identical buildings (for example, a three-bed semi-detached house) in different parts of the UK will have different rental values. The extra rent commanded by the more expensive ones is down to the "location, location, location" and that is the "site premium" and the tax base for LVT.
Alternatively, we can establish the gross annual rental value and deduct an estimate of running costs, of say £4,000 for a semi-detached house with correspondingly smaller or larger amounts for smaller or larger homes.
(For simplicity let's initially assume that all UK residential plots are being put to their optimum permitted use i.e. that for which they have planning permission. This is probably true for 95% of all plots. The other 5% are plots with derelict buildings on them; plots with useable buildings on them which are unoccupied; and there are around half a million plots which have planning permission but which have not been developed yet. Of the 95% which are actually being used (which have buildings on them up to the current permitted limit), there are only a few per cent at the top end (small building, big plot) where it would be economically/commercially worthwhile replacing an existing building with some smaller houses or flats (with or without LVT). So for valuation purposes, the working assumption is that they will be taxed on their current, actual use.)
Here are five more or less identical three-bed semi-detached houses from the first, fourth, fifth and tenth deciles, with one from the top one per cent for luck (downloaded February 2013):
Once we've established the site premium for the first house, the rest is just subtraction. The difference in rental values relates purely to the "location, location, location"/the site premium.
3. Using recent selling prices as a guide to rental values.
HM Land Registry now make all their price paid data for England and Wales available for free online, showing the full address and postcode and split into selling prices for flats, terraced houses, semi-detached and detached houses.
I downloaded price paid data for the year 2014; deleted the ones without a postcode leaving 850,000 actual transactions; applied the magic of pivot tables; calculated the average selling price of a standard three-bed semi-detached house (as reduced by one-sixth to use Savills' lower average price) in each of 2,288 postcode districts (there are about 10,000 homes in each postcode district); ranked them in ascending order and typed in the average rent from www.home.co.uk (adjusted as mentioned above) for each 20th district up to those with average selling prices £750,000 (things get a bit hit and miss after that); and ended up with the following chart:
The co-efficient of correlation is 0.87, which is high enough for these purposes. 0.0 = no correlation, 1.0 = perfect correlation. Whether the outliers are just outliers or whether some of the underlying data is inaccurate is unknown, but this will do to illustrate the principle.
We can then deduct the annual running costs (see above) from the gross rental values to arrive at the land-only rental value/site premium and express it as a percentage of selling prices. This suggests that there are very few areas where the site premium is less than 3.5%, and these are probably due to patchy data more than anything else:
Using the last twelve months' data gives us 300 to 400 sales in each postcode district, or 100 sales in each smaller postcode sector. Obviously, there is a trade-off between using selling prices for the last twelve months and for longer periods. If you use longer periods, then you have a bigger sample size but if prices have changed a lot, then the older prices themselves will be less indicative.
4. Adapting the Council Tax system.
We can easily apply the same approach as the original Council Tax banding, which put simply was as follows:
Step 1: Each council works out what it wants/needs to spend and subtracts its central government grants to give a small balancing figure to be collected in Council Tax.
Step 2: The council ranks all homes in its area by size/value, so the smallest flats in an area count as two-thirds of unit of housing (Band A) and the largest detached ones count as two units (Band H).
Step 3: The council adds up the resulting number of units of housing.
Step 4: The council divides the required tax (from Step 1) by the total number of units (from Step 3) and that is the tax on homes which count as one unit (i.e. semi-detached homes or large terraced houses, Band D). A small flat pays two-thirds of that and the largest detached houses pay double that.
The only tweaks that we have to make are:
Step 1: The total tax to be collected by each council is set by central government a % of the total site premium of all homes in the council area, so will vary widely between cheap and expensive areas. (Each council's central government grants are then adjusted accordingly; if councils reduce spending then the amount they have to collect in LVT goes down accordingly).
Step 2: All homes/plots in an area are ranked, and small flats count as (say) 0.4 of a unit; a normal 3-bed semi-detached counts as 1.0 and detached houses are ranked between 1.1 (i.e. linked detacehd) and 2.0 (the largest detached houses on large plots).
a) There is no need to value each individual home; this is expensive and leads to too many arguments; further, Land Value Tax is based on the site premium element of each plot-with-planning and completely ignores whether an individual home is well-maintained/has an extension/loft conversion or whether it is dilapidated/derelict. Each 'home' is unique and special; shapes drawn on a map are not.
b) Obviously, there is a trade-off between using larger valuation areas, such as postcode districts, with about 10,000 homes in each; or postcode sectors with about 3,000 homes in each (roughly equivalent to a local council ward); or even smaller areas than that i.e. street by street, or estate by estate. A postcode sector is probably the best size for these purposes. So the tax on all semi-detached houses in one postcode sector is the same amount.
c) Remember: it's only relative and not absolute values which matter. For example, if you are in a room with a dozen people all milling around and you have to guess how tall each one is in feet and inches, you'd struggle, but getting them to line up tallest on the left, shortest on the right is easy enough. If you are then told that somebody in the middle of the row is 5'6" tall, you can easily guess how tall the others are.
So you have to start in the middle and work outwards!
d) Local councils will be expected to cover a certain amount of local spending out of LVT and their central government grantscurtailed accordingly (separate topic). So let's take a median postcode sector, with 3,000 homes and an average home price of £170,000. The total required LVT from that median sector is 3,000 x £170,000 x 3.5% = +/- £18 million, average £6,000 per home/plot.
All the valuer has to do is count how many 'units' of housing there are in that sector and divide the £18 million by the number of units, that's the LVT bill per unit. Simple maths.
Our valuer could be lazy and just count each home/plot as 1.0 units, regardless of whether it is a studio flat or a five-bed detached house. So there are 3,000 total units. £18 million divided by 3,000 = £6,000 per unit, and the LVT bill on each home is £6,000.
Or the valuer could be a bit more sophisticated, and ascribe relative values, let's say 0.6 for a flat and 1.0 for a house. The sector is (say) 1,500 flats and 1,500 houses, so the total number of units is 2,400. £18 million divided by 2,400 is £7,500, so the LVT bills are now:
House = 1.0 x £7,500 = £7,500
Flat = 0.6 x £7,500 = £4,500
Or he can wait for the inevitable initial appeals to flood in. Let's say the owners of 600 terraced houses want them scaled down to 0.85 units. The valuer cheerfully scales them down and tots up his new running total, which is now down to 2,310. £18 million divided by 2,310 = £7,792. The LVT bills are now as follows:
Semi-detached or detached = 1.0 x £7,792 = £7,792
Terraced house = 0.85 x £7,792 = £6,623
Flats = 0.6 x £7,792 = £4,675
We can go on and on with these iterations, the valuer could have separate relative values for small flats and big flats, for low rise and high rise, for end-terrace and mid-terrace, for detached homes on small plots and detached homes on big plots, for homes with off-street parking and without, a premium on homes near the park and a discount for homes near the trunk road. It does not matter. The total LVT bill is always the figure we started with i.e. £18 million.
e) As must be obvious, every time some people want their home to be scaled down, everybody else's tax bill goes up a bit, and the valuer always ends up with a total tax base of £18 million.
In the end, people will realise that there is no point haggling any more. Or else the valuer just throws his toys out of the pram and says "If you can't agree to be sensible, I'll just go back to square one and just have a flat tax of £6,000 on each home".
Given that the majority of homes end up with a lower tax bill if there is some sort of grading, however rough and ready, by and large, common sense will prevail. Call it tyranny of the majority, if you will; there is nothing to stop the owner of the largest, nicest plot from selling up and moving into a studio flat, is there?
There are of course different ways of calculating the site premium:
- taking rental values and deducting an amount to cover the "bricks and mortar" cost;
- working out an overall average rental value per square yard in each area and multiplying that by plot sizes;
- if a street is a jumble of wildly different type buildings, simply working on the basis of plot widths;
- using recent selling prices as a proxy for rental values;
- we can do individual per home/plot valuations or use average figures for each category of home/plot;
- having a sophisticated system of valuing homes/plots in terms of 'units' or a rough and ready one;
- we can choose smaller or larger valuation areas;
- we can restrict ourselves to more recent data or include older data.
... each with their advantages and disadvantages, so there is no point pretending that any method gives us some scientifically verifiable figure accurate to three or four decimal places, so we could then put all homes nationwide into Bands (like Council Tax bands) and all homes/plots in the same Band pay the same LVT.
I personally prefer putting all homes/plots into bands which are twenty per cent "wide" because we can then have twenty-six bands (A to Z) and the ratio between the site premium/LVT on homes in Band Z is about one hundred times as much as that for homes at the top of Band A (the same ratio as we had with the old Domestic Rates). Over time, we can add extra bands at the top and bottom, that's just fine tuning.
Yes, we have to accept that there will be a flurry of appeals against the initial assessments.
a) Tactically/psychologically is makes sense to remember the following: if a home/plot has a site premium of "about £10,000" (i.e. somewhere between £9,000 and £11,000, there are different ways of calculating it) then it is better to assess it at £8,000 and charge 100% LVT (i.e. £8,000 per annum) than it is to assess it at £10,000 and levy 80% LVT (also £8,000 per annum). There would be far fewer appeals against the former than the latter, in the same way as appeals against income tax assessments are about whether a certain item is taxable or allowable - they are not against the rate of income tax itself.
b) Assuming that we go with the concept of relative values explained above, the valuation authority can be relatively relaxed about allowing appeals during the initial assessment stage; if half of people appeal and half of those get their home/plot downrated by 0.2 units, then the tax on the other three quarters goes up by a few per cent. The tax base is unchanged.
c) Banding reduces the number of appeals. If each home is given an individual, precise value, then it is worth putting in an appeal; but if all semi-detached homes in an postcode sector just go into the same Band, with flats and terraced homes in the two or three Bands below that and detached houses slotted into the next few higher Bands, then there is not much point appealing, short of pointing out that your home is actually a flat, not a terraced house.
d) There will be a clear set of rules for assessments, even if the result is a bit arbitrary in some cases. The appellant will have to show that the rules have not been applied consistently (i.e. there was a mathematical mistake) and/or that the home/plot in question is in fact much smaller than assumed, or suffers from some particular factor, i.e. is next to an electricity sub-station etc, which means that it should be in a lower Band (i.e. that the correctly calculated value is up to twenty per cent lower than the originally assessed value).
e) The main thing is that future increases in rental value are captured. If we significantly reduce taxes on earned income (by £200 billion), disposable incomes of tenants and first-time buyers increases and a lot of that increase will flow through into higher rental values (let's say by twenty per cent in the first two years, it might be much more). So even if a few of the initial assessments are a bit toppy, after a couple of years, even those will objectively be on the low side and things will quieten down.
According to Communities Secretary Eric Pickles' estimate, doing a revaluation for Council Tax would cost £280 million, i.e. about £10 per home. It might cost a few hundred pounds if there is an appeal (which is less than people pay to have an accountant prepare their Self-Assessment tax return prepared year in, year out).
But keeping the tax base up to date is a very minor issue, it will cost pennies per year per home/plot:
a) The second part of the calculation (relative values in terms of units) stays the same and it is only the first part (the total rental value of homes in an area/the total tax to be collected) which changes, you just have to make sure that the resulting assessed figure is in line with actual market values.
b) For the purposes of getting the ball rolling, you can arrive at fairly robust figures for the whole of the country in a few weeks using the methodology explained above i.e. by applying a fixed percentage to recent selling prices. If more tax is collected from land values and less is collected from output, wages and profits, then selling prices will change. They might go up (because of boost to economy), they might go down (a tax on land depresses its selling price), the two effects might cancel out.
c) In future, the amount of tax base will still be calculated on the basis of rental values. Information on gross rents paid by tenants can be collected as normal, and selling prices will still be a useful cross-check. But instead of applying a flat percentage to future selling prices to work out the tax base, the tax base will be the new selling price multiplied by e.g. prevailing mortgage interest rates PLUS the amount already being collected in LVT. Over time, the tax base will move closer and closer into line with market values.