Does the UK Tax Regime Distort the Housing Market?
Investment Homes, Relocation Specialist, Land Management
Part of how cities and towns accept new housing is through improvements in nearby infrastructure. But how that is assessed fairly is subject to debate.
The UK’s housing shortage problem is one with arguably many causes. Some trace it back to Thatcherism, selling off council housing without guaranteeing that affordable housing would be built to take its place. Others say the planning system, the preservation of green fields, tight financing rules, and the Great Recession of 2008-2010 (and later) all shook out buyers as well as builders.
Now with a resurgent economy, investors involved in strategic land development are betting on building and selling more houses to a country that clearly demands them. They work through and past the planning authorities, select homebuilders to construct houses, and they generally do well when a development is complete. But there still are certain stymying issues.
A good case can be made for the market distortions that some tax structures cause. One example of this is how the Stamp Duty Land Tax (SDLT) affects the price and liquidity of home ownership. On a home valued at under £125,000, there is no tax but until December 2014 there were incremental jumps to a 2% tax (£125,001 to £250,000), 5% tax (£150,000 to £925,000) on up to 12% for homes valued at £1.5 million on up. Those abrupt jumps created artificial reasons for holding down prices and therefore the types of homes that were built were often done so to stay below a SDLT threshold. Critics point out this “slab” system tax was designed in 2000, before the 139 per cent increase in average UK home prices that we have today. A new, incremental rate is progressive but gradual.
Other taxes imposed on developers can also dampen development. When joint venture partnerships form to convert land to housing - in all that entails - investors and builders have to budget for other costs as well:
Planning gain taxes - The objective of land investment funds applied to development is to be granted planning permission to build on land that was previously designated for a lesser (lower value) purpose. Planning gain taxes divert some of this gain to the public sector, which can be a fair way of funding public realm improvements. Some parties are critical of this system, saying the negotiation between developers and planning authorities can be wrought with inconsistency, unfairness, a lack of transparency and lengthy negotiations.
Community Infrastructure Levy - Councils in England and Wales can raise funds for infrastructure from private developers to support public development. It is charged on a per-square-metre of development basis. The benefit to developers of this system (versus planning gain taxes) is that the fee structure is established up front, applicable to all developers without a horse-trading process of negotiations. Planning Resource, an independent planning professionals intelligence firm, provides a current list of CIL charges for developments across the country.
But not all infrastructural improvements are compulsory. Land investors and developers who are strategic land specialists might voluntarily propose and build infrastructure around developments. To do so the developers need to have a fairly good margin on their project.
Individuals and institutions alike look to developers to create value from undervalued land. But all investors are wise to consult with an independent financial advisor for advice on where and how to invest real estate funds.
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