Written evidence submitted by Professor Tony Crook CBE, Dr Gemma Burgess, Dr Richard Dunning, Dr Alex Lord, Professor Craig Watkins & Professor Christine Whitehead OBE[1] [LVC 046]

Introduction

We are responding to two of the Committee’s questions:

•   What lessons may be learned from past attempts to capture the uplift in value?
•   Are current methods, such as the Community Infrastructure Levy, planning obligations, land assembly and compulsory purchase adequate to capture increases in the value of land?

Our evidence for these questions comes from our involvement in all but one of the studies on planning obligations that have been undertaken for DCLG (now MHCLG).  We collated all the evidence from these and our other studies in our recent book[2]. There is further supporting evidence in our study of planning obligations and CIL in 2016-17 undertaken for the then DCLG and recently published as part of the consultation documents for the proposed revisions to the NPPF[3].  This revised submission takes account of this latest evidence

Summary

1. This evidence covers two of the committee’s questions: (i) lessons from past attempts to capture uplift; (ii) the adequacy of S106 and CIL.
2. Land values increase for three main reasons: (i) new infrastructure; (ii) increased prosperity; (iii) planning consent. 
3. But increases are captured only on new development when it gets planning consent.
4. National taxation of development values enacted in 1947, 1967 and 1976 collected very little revenue and land was held off the market.
5. Planning obligations can be a de facto tax on development values, raising significant contributions for infrastructure and affordable housing.
6. Obligations involve complex and uncertain negotiations with significant local authority variations in policy and outcomes.  .
7. CIL was designed to increase speed and certainty but has become very complex, with many modifications and exemptions, reducing what is being collected.
8. Amendments to planning obligations and CIL could almost certainly capture more development value than new national taxes.

How increases in land values are currently captured

In England increases in land values have explicitly been captured by taxing what are called development values (that is the increase in land values arising from development) at the time that planning consent is given.  In a discretionary planning system as in England, the grant of planning consent is a good time to tax development value because values then crystallise. However, land values more generally are captured at times when it is transacted through capital gains tax and stamp duty land tax (SDLT).

There have been two ways of capturing development values in England, distinguishing between de jure and de facto means. De jure involves formal taxation of the development value. De facto involves charges (contributions from developers towards infrastructure and affordable housing) with charges resulting in lower land values. Charges avoid the issue of assessing development value and instead must be set to maintain development viability.

Three attempts at formal taxation of development values: policies

We have had three formal attempts in England (and the UK) to capture development value through de jure taxation. The tax was collected nationally and was not hypothecated for any specific need.  The latter two attempts also included rights to use compulsory purchase land at below market values.

1. Under the 1947 planning legislation a 100 percent development charge was imposed on development value. The approach was abolished in the 1950s.
2. In 1967 a Land Commission was established in part to collect a tax on development values (on this occasion called a betterment levy), initially at 40 percent (but to rise to 60, or even 80, percent) on all eligible development. This measure was abolished in 1970.
3. The Development Land Tax Act, 1976 (DLT) (preceded by a temporary Development Gains Tax in 1974) introduced an 80% tax. It was abolished in 1985. Thereafter increases in land values were treated as any other capital gain.

Tax levied by formal taxation of development values

Table 1 shows the annual tax levied in one year of each of the three attempts to tax development values. The taxes raised little and very little land was acquired.  Only 35 CPOs were made by the Central Land Board under the 1947 legislation (to combat land with-holding); the Land Commission acquired only 2,800 acres and local authorities bought only 2,357 acres under the Community Land Scheme (enacted with the DLT legislation), mainly in areas of least development pressure.

Table 1:   Value of development value taxes levied (selected years)

Source: Crook et al (2016)

Capturing Development Value in New Towns and in Comprehensive Development Areas

1. Post war New Towns legislation enabled the new town development corporations to acquire land at close to existing use value. This enabled the building of affordable rented housing and surpluses from commercial land trading to support infrastructure.
2. Similar arrangements were available to local authorities when acquiring land compulsorily in town centre comprehensive development areas (CDAs), where CDA plans had been formally adopted.

Lessons learned from formal taxation of development values

Why was there so little development value captured through national taxation? Reasons include:

• invariant and high national tax rates deterred landowners from bringing land forward;
• problems in assessing values on which tax was due; developers structured developments to minimise tax;
• landowners held on to land because the opposition were committed to repealing the taxes (as they did when they were elected); however
• the new town approach worked much more effectively, in part because it was local and enabled infrastructure and housing benefits for the growing community.

Capturing development value through Planning Obligations and Community Infrastructure Levy: the policies

Negotiated planning obligations became more significant from the 1980s onwards with local authorities’ powers consolidated in 1990 legislation. They allow local planning authorities to negotiate contributions from developers on development towards infrastructure and community facilities (in cash and in kind, most notably affordable housing on residential sites) needed to support new development at the time of planning consent.

Local authorities may only use planning obligations to meet particular needs.  Obligations have to be related in scale and type to the proposed development (the ‘rational nexus’ argument) except in relation to affordable housing which is a material consideration that can be applied to all viable residential developments above a minimum size (which can be above zero). In 2010 a tariff based Community Infrastructure Levy (CIL) was introduced to run alongside planning obligations giving local authorities the discretion to fix charges on all development to fund local and regional infrastructure, with obligations restricted to site mitigation and affordable housing. It was initially expected that developments of all sizes would contribute to CIL but obligations have generally not been sought from small developments,

Funds secured by planning obligations and CIL

Table 2 shows that planning obligations have proved a more successful means of raising revenue (in cash and in kind) than development value taxes. The majority has been secured in London and SE England, reflecting the geography of development and land values.  

Table 2: Value of planning obligations

Sources: Crook et al (2016), Lord et al (2018).

The evidence from our latest work on the incidence value and delivery of S106 and CIL in 2016-17 (see Table 2) shows an increase from 2011-12 both in nominal and real terms with over half of the value derived from obligations on affordable housing. The increased value since the 2011-12 study reflects both the greater number of new homes approved and the increase in house and land prices which ‘drive’  the value of affordable housing obligations.

Are planning obligations a de facto tax on development values?

In so far as these contributions are funded by developers paying less for land than they otherwise would, obligations are a de facto tax on development value. Evidence suggests that landowners generally do pay through lower prices where planning authorities’ obligations policies are clear and consistently implemented and where national developers are seeking consent and acquire land under options agreements. But where inexperienced small builders are involved the outcome may be different especially where they buy land without taking obligations into account. Moreover when there is public grant funding for affordable housing this tends to result in housing associations paying more for the affordable homes (compared with a zero grant position) resulting in higher land prices.  Who pays will also depend on the outcomes of the negotiations. Consequently the proportion of ‘available’ development value captured by obligations is extremely varied.

Why have planning obligations succeeded?

Reasons for the success of obligations in raising contributions include:

• unlike taxes imposed by national legislation, obligations are a ‘bottom up’ and not ‘top down’ policy, albeit framed by national planning legislation and policy;
• they are negotiated on a site by site basis, albeit within a framework of local plan policies, enabling varying circumstances with respect to viability to be addressed; 
• they have the character of a hypothecated tax because the values are enjoyed locally and the contributions are secured in private contracts with both parties able to enforce the agreements.

The limitations of planning obligations: overview

Obligations policies were once much criticised for their lack of policy transparency (hence uncertainty) and poor day to day practice (especially negotiations), but have become more transparent and tariffs have reduced negotiations. But there are still limitations:

• whilst the majority of large residential sites have agreed obligations, this is not the case for smaller sites. On commercial sites obligations tend to cover only retail developments. This partial coverage distorts what is developed;

• even before the (now restricted) ability to pool obligations from several schemes it had been difficult for planning authorities to secure the funds needed for large scale sub regional infrastructure – hence the introduction of CIL to address this;
• there are wide variations between planning authorities in local policy and what they secure. These policy and practice variations create uncertainty for developers operating across several authorities;
• the variations are not strongly related to variations in market demand and land prices but to different local policies and practices, including effective monitoring and enforcement of contracts, with different outcomes between authorities in similar market circumstances;
• capturing development value through planning obligations works best in market upturns and less well in market downturns;
• significantly more could be secured if all planning authorities adopted similar policies and followed good practice;
• many planning authorities lack the skills and capacities to negotiate and  negotiations can be slow and outcomes uncertain;
• recent increases in permitted development (e.g. existing offices to residential use) reduce what planning obligations can secure.

The limitations of planning obligations: renegotiations

After the global financial crisis there were government concerns about sites being stalled because of onerous obligations and in 2013 developers gained rights to seek renegotiation earlier than hitherto.  Planning authorities tended to respond by rescheduling the timing of obligations.

In London, in particular, the new emphasis in the 2014 revisions to the National Planning Policy Framework on ensuring that obligations do not undermine viability has led to reductions in affordable housing obligations, despite the recovery in house prices and land values. This is in part a result of the reliance of residual valuation models to test viability, despite their acknowledged weaknesses, and the continuing asymmetry between the skills of local authorities and developers. Developers have paid higher land prices expecting that renegotiations can enable fewer obligations.

Community Infrastructure Levy: initial experience

CIL: has mainly been adopted by planning authorities in high demand areas. In many lower demand areas CIL has not been adopted because of viability concerns and because fixed charges may reduce the development value ‘left over’ for affordable housing. Because of this many small scale developments in lower demand areas are making no contributions to infrastructure even though they could afford to do so.

As a flat rate charge not subject to site negotiation, CIL was originally conceived to be faster, fairer, more certain and transparent, but its introduction and implementation has proved complex and time consuming.  The regulations have been changed four times and several exemptions have been introduced, reducing the proportion of development potentially contributing to CIL (some local authorities estimate they have lost up to half their potential CIL income) and up to a quarter of funds raised now have to be devoted to very local needs through using CIL income to fund local groups in the vicinity of new developments.  Overall, considerably less has collected than initially anticipated.

Conclusions

‘Capturing’ land value has a number of objectives: raising revenue; charging for infrastructure and community needs; and increasing equity in relation to unearned value increases.  Although neither taxation nor charging capture all development value, it must be accepted that taking all or a large proportion of the value also impacts on viability and willingness to sell land. Landowners and developers will also (depending on their individual tax positions) pay additional taxes on development value, including capital gains tax and stamp duty land tax. Hence the total land value capture may be significantly higher than from development value taxes and planning obligations alone.

There are measures which could be taken to reform current arrangements so that they work better and enable more to be collected and/or contributed including:

• introducing a fixed tariff (CIL like) obligation on all small residential sites and all commercial development;
• using negotiated S106 and not CIL for large sites, taking into account the long term scale of development;
• removing all exceptions (since all development requires infrastructure) and removing the mandatory obligation to share any CIL-like tariff with local community groups.

For very large scale development (e.g. town extensions and new settlements) private/public partnerships might be introduced building on the New Towns legislation and the 2007 Neighbourhood Planning Act powers to acquire land at values that do not take full account of the full market value created by these schemes.

March 2018