Written evidence submitted by the Town and Country Planning Association [HLV 014]

Summary

The Town and Country Planning Association (TCPA) has developed a detailed body of evidence about the power of the planning system to positively support healthy lives, high quality affordable housing and climate resilient, fairer places that are vital to the nation’s future. Achieving these outcomes requires an effective economic model which can capture land values currently extracted by landowners and developers and instead invest these values into the social infrastructure and long-term stewardship crucial to healthy place making. This evidence briefly explores some of the principles and mechanisms which have been applied to land value capture along with some of the important limitations of the current policy approach. The overall message of this evidence is in four parts:

1. While our current approach to land value capture based on the Community Infrastructure Levy (CIL) and section 106 agreements is ad hoc and opaque it does nonetheless yield significant amounts (£7 billion in 2018/19[1], 67% of which was spent on affordable homes) towards infrastructure investment which would otherwise have to be funded through general taxation. We remain concerned that our current approach is spatially regressive yielding higher incomes in high demand areas and can positively undermine placemaking by failing to pay for an infrastructure led approach. We also note that land value capture should not be regarded as a ‘money tree’ and all the competing demands placed on ‘planning gain’ cannot all be met solely by taxing land values. The Committee should also note the significant revaluation of land that will result from the dramatic increases in flood risk in many parts of the nation.
2. There has been an extensive literature on the technical aspects of implementing various methods of comprehensive land value capture but the principal cause of the failure of past approaches has been the lack of a clear political census about the merits of such taxation. It is this lack of political clarity rather than any technical issues which have been the root cause of the current suboptimal system.
3. In making recommendations for future change the TCPA believes that, in the short term, an evolution of the current system rather than its wholesale replacement is the most effective response. This should include the deployment of development corporations for large scale strategic sites because they offer the most effective way of capturing land values for public benefit.
4. In the longer term, the TCPA does believe that there is a case for comprehensive land value taxation in general and betterment taxation in particular. In achieving that outcome, the TCPA strongly recommends that the Committee sets out the core principles which should underpin those reforms. We set out the TCPA’s view of these objectives in section 3.4.

Introduction - about the TCPA

The Town and Country Planning Association’s vision is for homes, places and communities in which everyone can thrive. Our mission is to challenge, inspire and support people to create healthy, sustainable and resilient places that are fair for everyone. We do this by shaping policy and practice internationally, nationally, locally and through working with communities.

Informed by the Garden City Principles, the TCPA’s strategic priorities are to:

Work to secure a good home for everyone in inclusive, resilient and prosperous communities, which support people to live healthier lives.

Empower people to have real influence over decisions about their environments and to secure social justice within and between communities.

Support new and transform existing places to be adaptable to current and future challenges including the climate crisis.

Background

“Debate has raged in this country over the right way to recoup the share of the profits from land development that rightly belongs to the community, since public agencies have had to provide much of the physical and social infrastructure, and since the land values arise in large measure through the grant of planning permission. What has eluded us is…to find a way of capturing the added value that is effective, efficient in operation and politically acceptable enough to be stable over time.”[2]

Sir Peter Hall’s quote is an excellent summary the complex betterment tax debate. This debate is not new, but it is often surrounded by confusion about the source, collection and distribution of the values, which arise from development of land and property. The English planning system has employed multiple ways of capturing these values since 1947[3] but has ended with a system which, while yielding some significant benefits, lacks transparency and tends to reinforce spatial inequality. Since land use regulation and betterment taxation are inextricably linked, and because land value capture could support positive planning, achieving a lasting settlement to the land tax question should be a key priority for government.

The TCPA acknowledges the wealth of expert literature on land value tax. A wide variety of experts[4] have written on this subject but Planning Gain by Crook, Henneberry and Whitehead (2016) provides an excellent summary of the historical, international and contemporary issues around development taxation. Subsequent work by Crook and Whitehead has examined comparative approaches between England and Scotland. The 2018 CLG Select Committee report[5] provided important recommendations which were not ultimately taken forward by the government. Work which the TCPA is supporting with Miles Gibson at the University of Cambridge is examining the wider issue of comprehensive betterment taxation and there have been separate reviews on the economic implications of general land and property taxation including the Mirrlees Review[6].

The betterment question

Rather than the general question of land and property taxation this evidence is focused on taxing the specific values which arise through betterment. Both giving consent and investing in infrastructure by public bodies increase the value of land. The best description of the betterment question remains the 1942 Uthwatt Report[7]. Previously described as the ‘unearned increment’, betterment values arise continuously across society by the provision of public services. The most obvious example is through the provision of new transport infrastructure leading to increased property prices.

Betterment also occurs through any system of land use control where the right to develop land rests with the state rather than with the landowner. Gaining planning permission from a current use to a new and higher value use changes the price of land. This change can be up to 100 times the current use value of the site. It is worth reinforcing the legal reality that development rights were nationalised in 1947. Landowners do not own the right to develop their land. It follows that they have no legal ‘right’ to the value created by the grant of permission. This was the powerful logic of the 1947 betterment taxation regime, which recouped betterment at a rate of 100%. The subsequent practical experience illustrated that this logic was unworkable in a market economy where the supply of land depended on willing sellers. That is why extreme care is needed when setting the level of any tax or charge at a rate which does not extinguish the land market and/or giving public authorities a much greater role as ‘master developer’.

The case for betterment taxation

The inter-relationship of the property development market and the land-use planning system as well as direct public investment in infrastructure creates a substantial and unrecouped public asset. This betterment asset should, as a matter of principle, be used prudently for the public good in ways which support public interest objectives. This is principally an issue of equity, but the use of such an asset for infrastructure has obvious benefits for the wider economy and society. Conversely, giving away betterment values to landowners drives a highly speculative land market which can reward inactivity and contributes to the adversarial culture of the current system. Betterment taxation could have other benefits including influencing the consumption of sites to achieve an environmentally and socially more benign land-use patterns by imposing graduated tax rates, for example, zero-rating social rent or using brownfield sites.

The limitations of betterment taxation

It is important to recognise that land value uplift is not an abstract ‘money tree’ which can be endlessly tapped for public good. Such values depend on wider societal demands for development, and any intervention in the market to recoup these values will impact on market conditions for land. Although more effective ways of capturing betterment values could increase yields it is still unrealistic to assume that such values can pay for all the growing costs of infrastructure provision, nature recovery and remain the prime funder of affordable homes. This is particularly the case when climate impacts are beginning to drive a fundamental revaluation of land prices in many parts of the UK.

The Garden City development model

The TCPA recognises that the Committee has not sought to explore the Garden City development model directly. That model had transformational outcomes in the built environment and still has relevance in any discussion of land value taxation. In its the broadest terms, the Garden City development model seeks to permanently evolve the economic system based on the creation of social value. This was a mutualised development model where profits and liabilities of economic activity are shared amongst the community. The model is based on a mixed economy, with space for private enterprise, but the core activities necessary to secure the objectives of inclusive place making are to be conducted on a mutualised basis. This model was pioneered at Letchworth Garden City and remains the most comprehensive and progressive model of the creation of new communities.  

Responses to specific questions

How effective and efficient are current mechanisms of land value capture in England?

Comprehensive betterment taxation in England finally ended in 1985 and has been replaced by a fragmented approach based on discretionary implementation of Community Infrastructure Levy (CIL) and section 106 agreements, which are effectively ad hoc contracts between planning authorities and developers. A range other taxes already exist which imperfectly capture aspects of land values including Income tax, capital gains tax and corporation tax which are capable of recouping the wealth generated by land, but the most direct measure is in fact Stamp Duty Land Tax (SDLT) which relates to both property and land over certain thresholds. This tax is payable by the buyer of land and so only applies when a transaction takes place. Taken together, this regime is less than coherent and does not deal efficiently with the kinds of betterment value discussed above.

1. Section 106 agreements

Section 106 agreements can involve lengthy negotiations and provide highly variable yields to localities[8]. These are spatially regressive mechanisms yielding much less ‘planning gain’ in low demand areas. For example, in 2018/19 53% of all developer contributions were secured in London and the South East and just 6% in the North West[9]. Section 106 agreements, which can include in-kind provision of affordable homes, are generally related to development costs and can be viewed as charges or ‘impact fees’ rather than taxes. Section 106 agreements are inefficient in terms of capturing betterment because they tax development values rather than land values. Section 106 agreements survived the introduction of CIL with some restrictions, and crucially they appear to yield much greater levels of direct and in-kind benefit, particularly in relation to ‘affordable’ housing provision. In 2018/19 section 106 agreements in England represented 85% of all developer contributions[10].

Previous analysis[11] of the section 106 process has also highlighted the continued concerns of local government in that developers seek to ‘game’ the process using the policy space created by the need for viability assessments. While planning guidance has gone some way to clarifying the degree to which developers can negotiate away section 106 obligations, the balance of influence still rests decisively with the private sector. Ultimately, developers can simply refuse to sign section 106 agreements leaving the local authority to fail the housing delivery test, or they can renegotiate such agreements to dramatically reduce affordable housing contributions. In some cases, this can reflect the legitimate challenges of changing market conditions, but such uncertainty illustrates the dysfunctional character of section 106 as a rational basis for supplying both the necessary infrastructure and affordable housing which is required in the public interest.

The failure of section 106 agreements to provide upfront infrastructure

Although section 106 agreements yield significant sums it does so in a way which undermines sustainable place making. This is because funding secured through section 106 agreements is largely paid after the initial phases of housing development have been commenced so key social and transport infrastructure follows the initial housing development. This undermines one of the most important principles of good planning which is an infrastructure first approach. Under this approach, followed in most of the sustainable communities in Europe, key social and transport infrastructure facilities are delivered first so that from the outset residents can rely upon comprehensive and walkable facilities rather than being locked into, for example, car dependency. Because section 106 money is often dependent on private sector developers selling the first phase of a scheme housing can be provided without any of these basic social facilities. The experience of the TCPA’s New Communities Group[12] demonstrates that new development can be left lacking basic amenities including food shops, GP surgeries and dentists for up to a decade depending on private sector build out rates and other infrastructure investment. The failure of section 106 to provide an infrastructure first approach also slows housing delivery with consented schemes of up 10,000 homes currently delayed because of basic issues such as road access.

The CIL regime

Widespread concern about the lack of transparency of section 106 agreements for the public and the transaction costs for the private sector led to the development of a more codified approach in the CIL regime introduced in 2008. Again, the stated logic of CIL was not to comprehensively tax betterment but to provide funds for infrastructure costs that resulted from the impacts of new development.

CIL was reviewed in 2016 by a group led by Liz Peace. That review highlighted the variable uptake of CIL by local planning authorities, which were focused in high-demand areas. Many low-demand places have no scheme and no intention of applying one. This reflects the same basic weakness as the section 106 regime which is to be dependent on local land values.

The review also highlighted that the amount generated by CIL was much lower than anticipated, with an expectation that it might yield between £470 and £680 million p.a., whereas by March 2015 it had yielded £170 million. The estimate of the contribution of CIL to local infrastructure is between 5% and 20%[13] of the total cost.  

This picture reinforces three significant points:

1. The current method of recouping development values relies on the voluntary implementation of CIL and the ad hoc use of section 106 agreements. Both are spatially regressive taxation measures in the sense of yielding most benefit in higher demand areas.
2. Section 106 agreements tend to undermine an infrastructure first approach vital to good place making.
3. The approach does not cover the cost of the majority of infrastructure investment provided by the public sector[14]. Given that house building has also been subject to very significant public subsidy, it is interesting to reflect on the wider question of fairness between taxpayers and those who profit from betterment values.

Both section 106 and CIL charging schemes must be set in the policy context of the NPPF viability test, which preserves the expectation of high developer profit margins.

The proposed national infrastructure levy

The previous government set out plans for the introduction of a national infrastructure levy which would have had some important benefits in terms of allowing planning authorities to borrow against future levy receipts[15]. However, there were also widespread concerns about the complexity of the design of the scheme. This, along with pressure from the private sector to retain section 106 agreements appears to have stalled the implementation of the levy.

In the absence of the proposed infrastructure levy not being taken forward, we continue to have a combination of general taxation measures such LTSD which relate to land values but do not focus specifically on betterment, and on impact fees which, while both inefficient and spatially regressive, do yield substantial sums. However, the framework does not appear to yield enough return to cover the costs generated by development in terms of wider infrastructure. This contributes to one the strongest criticisms of the planning system that it cannot drive effective delivery by unlocking sites which need upfront infrastructure investment. All of this suggests a failure to effectively balance the needs of society and taxpayers with the needs of landowners. The prize amongst all this detail rests in aligning a betterment tax regime and planning regulation to enhance the delivery of high-quality outcomes.

What alternative methods of land value capture might be most suitable for England?

• Would alternative mechanisms of land value capture deliver more affordable housing and public infrastructure than the current section 106/Community Infrastructure Levy regime?
• How could the benefits of alternative mechanisms of land value capture be realised across England, including regions with lower average land values?

Reforming land value capture in England has to begin with a clear assessment of why previous regimes have failed. Historically three comprehensive attempts have been made to tax the betterment values which accrue to landowners. The 1947 development charge model based on the recommendations of the Uthwatt Report was a general development charge (with exceptions) designed to ensure both a fair distribution of development values and reduce land speculation. The method was to tax any increase in land values generated by the grant of permission at 100%. The money was collected centrally and distributed to support development by a central land board. It was notable for having an explicit spatially redistributive effect.

Betterment taxation rates were based on the laudable principle that all the value created by the state should be recouped by it. Experience after the 1947 Planning Act illustrated that such a 100% levy effectively killed off the speculative market in land, reducing supply to a very low level. The repeal of betterment taxation in the 1950s led to a resurgence of private sector development. The reintroduction of betterment tax in the 1960s and again in the mid-1970s failed largely because the opposition made clear that they intended to repeal the legislation if they came to power. Landowners therefore hoarded land in the hope of receiving the full value later. In the future, it would be vital to have a consensual approach to setting taxation rates at levels which do not undermine the land market. It will also be important to achieve accurate assessments of land values in particular localities and, potentially, for differing development sectors. Calculating land values is complex[16] but is already being achieved for commercial and taxation reasons which reflect regional variations.

1. Contemporary attempts to reform betterment taxation

Various attempts have been made to provide a more comprehensive basis for betterment taxation beginning with Kate Barker’s 2004 recommendations for a ‘Planning Gain Supplement’, which was an attempt to tax landowners at the point permission was granted.[17]. After much debate and scrutiny this system was not introduced partly because it was perceived to remove local flexibility. The proposal for a national infrastructure levy enabled by the Levelling Up and Regeneration Act 2023 raised similar issues about the balance between a nationally prescribed system and local flexibility. This is a particular problem for any system of betterment taxation that is based on impact fees paid by developers rather than a comprehensive tax paid by landowners. Understandably, politicians who are accepting the need for development in high demand areas wish to see the full value of any impact fees spent on the mitigation of such development.

Short term solutions to improving betterment taxation

The development corporation model: The 1946 New Towns Act created a unique method of handling strategic development which came with its own economic approach. The heart of this model was the designation of publicly controlled development corporations (DCs). This model allowed a DC to purchase land at its current use value and to use the profits of the development process to finance infrastructure and pay debt. Values were derived by both forms of betterment described above and rested on the use, or threat, of compulsory purchase. The model proved highly successful until changes to the compensation code in 1959 introduced ‘hope value’ into the compensation formula, giving landowners a much greater share of the betterment. This form of land value capture is popular and relates to other European models, being politically more acceptable by limiting the tax to particular kinds of development in particular places. The powers of DCs still exist but, despite some recent and welcome changes to the compensation code, the issue of hope value has not been entirely resolved. Neither does this model have any capability to spatially redistribute resources[18].  

Right pricing land: For completeness, it is also important to note that some commentators[19] have argued that the simplest and most direct method of capturing development values is to set ambitious policy in local plans for a range of public goods. These requirements create costs for developers and those cost will ultimately be reflected in lower land prices. This is a powerful proposition, but it can only function where such policy requirements, for example for affordable homes, cannot be gamed away by the private sector using viability assessments. The success of this model in some European systems depends on the much more powerful legal status of the development plan.

What mechanisms of land value capture have been effective internationally?

There is a very useful literature[20] on international approaches to land tax, but as this commentary notes there are serious difficulties of transposing approaches, which are often based on zonal, codified planning systems, into the discretionary English system. Taking forward the German system, where land values are frozen at current use value when allocated in plans, would be problematic for an English system where the plan has a lesser status in final decisions. The point here is that there is an interesting and potentially positive benefit from strengthening the status of the local plan in terms of the certainty it might bring to new forms of betterment taxation. 

Previous explorations of land value capture have also highlighted the practise in nations such as Germany and the Netherlands where the public sector plays a much stronger role as master developer. These international examples have important commonalities with the Development Corporation approach described above. In particular they demonstrate the importance of a need for a master developer role securing uplift from infrastructure investment and effectively derisking the development process. Private sector partners then play the role of developing residential and commercial property but not the role of land speculators. Neither is the delivery of key infrastructure dependent on complex private sector agreements.

Should reforms to land value capture be pursued through changes to the current section 106/Community Infrastructure Levy regime, or by introducing a new mechanism?

• What changes to planning law and guidance would be needed to introduce a new mechanism of land value capture?
• Would new methods of land value capture be compatible with human rights legislation, regarding property rights?

In the long term there is no doubt that a comprehensive and simplified form of betterment taxation that is capable of supporting an infrastructure-led approach and has a redistributive element would be a desirable outcome in the UK. However, in the short term it is hard to see that the section 106 and CIL regimes could be comprehensively replaced without major disruption to the system. However, the government should pursue procedural simplifications and particularly a renewed emphasis on the take up of CIL[21] and the effective re-balancing of viability testing policy to ensure a fair outcome between the public interest and developers. An increased emphasis on CIL could also lead to mechanisms to allow local authorities to borrow against future receipts for upfront infrastructure delivery. None of these proposals would require primary legislation.

The powers to introduce Development Corporations are also already established in primary legislation which sets out a number of different routes to Development Corporation status. The practical effectiveness of mechanisms such as right pricing land will be considerably enhanced after the implementation of the Levelling up and Regeneration Act 2023 provisions which strengthen the status of the development plan.

All of these measures require well-resourced and effective mechanism for the compulsory purchase of land. Compulsory purchase represents a vital backstop where developers argue, whether legitimately or not, that proceeding with development is unviable. The public sector must have an effective way of unblocking development where, for example, developers have paid unrealistic prices for land.

1. The objectives of a new land value tax regime

In the longer-term the government should set the objectives which will guide the comprehensive reform of betterment taxation. These objectives should include:

1. The comprehensive taxation of landowners for the betterment values created by the grant of planning permission or other investment by the state.
2. Provide for a way of financing an infrastructure first approach which can effectively unlock development and result in sustainable place making.  
3. Encourage the objectives of sustainable development by reinforcing a set of ‘good’ behaviors in relation to, for example, brownfield site development.
4. Be defined by progressive taxation principles requiring a redistribution of resources to support investment in regeneration in lower demand areas.
5. Retain public and private sector legitimacy by being transparent and procedurally efficient.

The components of new system?

Developing a new betterment tax regime requires more detailed analysis but, in principle, it might be based on a flat-rate betterment charge levied on landowners at the point of planning consent and based on a proportion of the increase in value between current use and consented use. This is crudely the reimagining of the Planning Gain Supplement proposed by Barker and has some similarities to the proposed national infrastructure levy. Exemptions would apply to a wider range of minor domestic and commercial development. The revenue would be collected locally by local planning authorities and hypothecated for infrastructure delivery. A national infrastructure contribution would be paid by local planning authorities to Treasury to generate a fund to support investment and growth in areas in need of regeneration.

Alongside this general approach would be the much greater use of Development Corporations to deliver large sites based on their ability to buy or compulsory purchase land without the application of speculative hope values. Instead, landowners should be paid a flat rate of compensation based on current use value plus a percentage of consented use value. Extending this approach to land allocated in development plans also has significant potential. This implies changes to the compensation code on issues such as hope value which the government is already considering.

How could different mechanisms of land value capture complement the Government’s ongoing planning reform agenda, including delivery of New Towns and the release of ‘grey belt’ land for development?

As set out in section 3.2, we believe that the Development Corporation model will be essential to the economic viability of the government’s ambitions for a new generation of new towns. The TCPA has also made clear that it does not support the government's policy on the release of grey belt which it regards as further fragmenting the coherence of Greenbelt designations while making no strategic contribution to housing needs.

Overall, would reforming land value capture support or distract from the Government’s target of delivering 1.5 million new homes by the end of this Parliament?

Land value capture is the essential foundation of high quality and affordable place making and therefore central to the government's housing ambitions. Without an effective form of betterment taxation, the full burden of meeting the necessary infrastructure and affordable housing will fall on the public sector. However, there are powerful reasons why previous attempts to reform betterment taxation have failed partly because they are trying to intervene in a highly speculative and dysfunctional ‘current trader’ development model which dominates volume housing provision.

“The vast majority of house builders follow the “current trader” business model which consists, in essence, of cycle of land acquisition, development and outright sale. Profit is the margin between sale price and development costs; the developers retain no long-term interest in the property.”[22] 

Development costs are made up of a range of factors, from materials and labour to the cost of land[23], borrowing and planning requirements. After accounting for all of these costs, housing developers often seek profit margins of between 20% to 30% per unit. This is relatively high in relation to other major domestic commodities. Many of challenges of the planning system on quality, affordability and long-term stewardship flow out of this dominant development model, but two issues are particularly relevant for the land tax question:

1. In theory if higher requirements are placed on developers for quality outcomes, then developers will seek to preserve their profit margin by paying less for land.   
2. The commercial expectation of relatively high profit margins means that developers will simply not build if requirements or taxes are set at too higher level. This is at the heart of the NPPF viability test, which was written specifically to support the current trader business model. 

In short, it matters where the burden of taxation falls between landowners and developers. It also matters that methods for land value capture are understood before land is purchased or optioned. It is also crucial that local planning authorities have the power and resources to compulsory purchase land where developers have no interest in building out at rates which accord with the public interest. Finally, any debate about the current trader business model needs to consider that the model has been subject to very substantial public subsidy through direct support for owner occupation through schemes like Help to Buy and through wider investment in infrastructure where the costs are not fully met by the private sector. 

March 2025