People who know a bit about blocks of flats and leaseholds (but not very much, obviously, or they wouldn't raise such daft objections) claim that it would be very difficult to apportion the LVT bill between the leasehold flats and the freehold. I discussed this with Ben W (the ideas factory - more to follow) in the pub' and we came up with a couple of simple methods. It's actually very easy, if you know what you are talking about and apply common sense.
For illustration purposes, let's assume that one person owns the freehold of the block. There are ten leasehold flats with thirty years to run. Each flat has to pay £200 a year ground rent to the freeholder. The bricks and mortar rebuild cost/value is £500,000. The total site rental value is £50,000 and the LVT to be collected is £40,000 (80% of rental value).
The alternative methods of apportioning that £40,000 are:
1. The Table in Schedule 5 TCGA 1992 was designed for a different purpose, but the principle is the same. This tells us that a leasehold with thirty years left to run is worth 87.33% of a freehold flat (fifty or more years, makes no difference). This is merely the NPV discounted at 5%, from memory. So the freehold must be worth 12.67% of the whole. So the £40,000 is apportioned 12.67% to the freeholder £5,068 and 87.33% to the flats £3,493 each.
2. LVT is on the current rental value, and the freeholder receives £2,000 rent a year. So his bill is 80% x £2,000 = £1,600, leaving £38,400 to be collected from ten flats x £3,840 each. We just ignore the future value when the leases end.
3. We assume that the £40,000 bill is, in the first instance, split up between the ten leasehold flats unless they have put in an offer to acquire the freehold reversion, under the provisions of the Leasehold Reform Act 1993, which says that leaseholders have a right to buy the freehold for its market value (plus minus other bits and pieces). So the leaseholders can write to the freeholder and ask him how much he'd sell the freehold reversion for.
So all the leaseholders need to do is value the leasehold flats as they stand (not too difficult - in this example let's say £60,000 each) and the freeholder names his price. The LVT is then simply apportioned pro rata. If the freeholder asks for £75,000* and the leaseholders think this is too high, he pays 11.11% of the bill £4,444 and the tax for each leasehold flat is £3,556 - unless the leaseholders want to enfranchise and buy the freehold off him for the price he named. If he is too greedy and the leaseholders don't want to enfranchise, he ends up with a larger share of bill. If he is not greedy enough, he will end up selling for undervalue. This is how prices are set in free markets.
4. Whichever method we use, it's no big burden on the freeholder. If he thinks he is being saddled with too much of the bill under method 1, he can always just waive his interest and allow it to revert to The Crown, or he can extend the leases unilaterally for free.
And he can pick and choose his own tax bill under method 3. If he is not prepared to pay more than £2,000 (so that it's cash neutral each year), then he has to offer the leaseholders the freehold reversion for £31,500 or less (you check the maths); if they accept, then he gets his £31,500 and is out of the picture; if they think this is too expensive, he ends up with a £2,000 annual tax bill which is conveniently covered by the ground rents he collects.
5. We can apply the same principles to leases of business premises, where the rent is often fixed for five or ten years in advance , but I'll leave that to you to work out for yourselves.
All sorted, next non-existent problem please!
And can we have something different to "Poor Widows In Mansions"? I'm really bored with that one.
* A note on valuations: the value of the £2,000 annual ground rent is worth (say) £30,000. In thirty years' time the freeholder gets the unencumbered leasehold of the whole building. The building is worth £500,000, the same table and tells us that the value of that freehold interest is about 13% of £500,000, but as he doesn't know what state it'll be in in thirty years' time, he might value that at £45,000 and ask for £75,000.
Friday, 30 March 2012
Killer Arguments Against LVT, Not (209)
My latest blogpost: Killer Arguments Against LVT, Not (209)Tweet this! Posted by Mark Wadsworth at 22:15
Labels: KLN, Land Value Tax, Maths, Pubs
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11 comments:
come on...you need to weight it - I believe that even Business Rates rate higher-storeys higher than lower-storeys, unless you feel that a basement flat is worth as much as a 5th storey flat because it has the same area. And then you have to guard against service charges - landlords might allocate communal charges (non-tax deductible?) back over individual flats.
OK...these are no more than niceties. But they bear some consideration when you are talking about Mayfair.
G, sure, it's not up to the government to decide arguments between bickering owners of different flats in a block as to how much each is worth, but they can adopt the same "I cut, you choose" principle as between leaseholders and freeholder.
I've covered this before, i.e. in my example, the two basement flats might say that their flats are only worth £40,000 each, so they only want to pay 40/560 x £40,000 each. The owners of the other flats can then either buy them out for £40,000 each or decide to man up and pay a slightly higher share of the tax themselves.
When you think of the millions of transactions that take place every hour in the free markets, and all the constant negotiations over food prices, raw materials, how to split up the restaurant bill, whether it's worth buying a new television and if so how much and whether it's worth haggling etc, surely this can't be impossible?
Service charges are a separate issue, some freeholders rip off their tenants right royally (in the most literal sense of the word) anyway, so what's new? There are laws governing this.
As to Business Rates, the degree of detail they apply is way over the top, as they value the front part of a shop (the window) different to the middle or the back, each storey has a different value etc.
Remember: LVT is mainly about revenue raising, it is to some extent arbitrary, just like any other tax (even income tax) and it is about valuing the site land only, not the buildings. It's not even about absolute values but relative ones.
"Whichever method we use, it's no big burden on the freeholder. If he thinks he is being saddled with too much of the bill under method 1, he can always just waive his interest and allow it to revert to The Crown"
Really? Says who?
A freeholder has a contract with every leaseholder, he can't just abandon his obligations under those contracts if he finds them (or tax) inconvenient.
TFB, I say it. Yes he can abandon the burdens, provided he abandons the benefits as well. The leaseholders still have an interest in the block being maintained and can do it themselves.
I think method 2 is easiest to understand.
If ground rent is £50,000 for the block and tax rate is 80%, freeholder ends up with £10,000 after tax of £40,000 has been paid. Taxable rental value per flat is £5000, thus £4,000 should be paid per flat ie total of £40,000.
Leaseholders can hand over £1,000 each (ie they deduct £1,000 from what they pay their landlord)to the freeholder and pay £4,000 each in tax. Or the landlord pays all the tax and passes some of it to the leaseholders with the demand for the ground rent.
Alternatively, freeholder is billed for £40,000
's liability is 80% of £2000 per flat ie £16,000 for the block and he gets to keep £4,000. The remaining £36,000 is apportioned amongst the tenants.
I would expect the freeholder to be billed and he would then add the balance of the tax due to the ground rent chage. Thus if the present GR charge was £2,000 and the tax due per flat were £4,000, the freeholder could add £3,200 to the GR charge
Phys, no in my example the total rental value of the site is £50,000 and the tax is £40,000.
The flats are on long leaseholds with thirty years remaining, each paying £200 a year in 'ground rent' (in the narrow sense) to the freeholder/their landlord.
Thus at present, until the leaseholds expire, the freeholder has an annual cash rental income of only £2,000, being ten flats x £200 each.
I think my maths was completely up the spout anyway. You can't see as much on a screen as on a whole sheet of paper.
People tend to renew leases otherwise the flats become unsaleable. My freeholder receives about £250 pa on flats with renewed leases and £50 on leases with 50 years to run out of the original 99. And what do we get for it you might ask?
"A freeholder has a contract with every leaseholder, he can't just abandon his obligations under those contracts if he finds them (or tax) inconvenient."
Can he not sell the freehold? If so, what is to prevent him selling it to the Crown for £1?
http://johnredwoodsdiary.com/2012/04/02/tax-is-usually-taxing/#comments
Get in there Mark and give em hell.
VF, I left the following comment, which might or might not appear later on:
"The level for maximum good for the voters in wealth and general living standard is perhaps around 20%."
You're starting with the flawed assumption that incomes should be taxed in the first place. The way to maximise private wealth and living standards is not to tax incomes or output or profits at all - and for the government to collect revenues by levying user charges on the rental value of land instead.
The tax rate required to maximise economic growth, living standards etc is something approaching a 100% charge, but 80% will do.
And yes of course, this also depends on how the government spends the proceeds; by definition, the best kind of expenditure is stuff which boosts rental values even further (more roads, better education, citizen's dividend etc and less quangos, third world aid, payments to EU, PFI, bureacracy and so on).
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