One of the supposed practical objections to replacing taxes on earned income with LVT is valuations, the army of surveyors, endless appeals etc.
There are at least three 'secret weapons' which will sort all most of this out without a shot ever being fired in anger:
1. Banding
Try looking up your car tax; it depends on when the car was first registered, engine size or CO2 emissions, whether it uses alternative fuel and various other bells and whistles. I do not agree that any of this is a suitable subject for taxation (as opposed to fuel duty or parking charges) but nonetheless, somehow we manage to arrange thirty million privately owned cars into one of dozens of bands and you pay your tax because it's the law (as stupid as it might be). You can't go and whine that the rental value of your brand new 4x4 is less than £1,050 a year because that £1,050 is just a number on a bit of paper.
It's not rocket science to do some computerised valuations based on millions of actual data points (selling prices minus approx. bricks and mortar cost and/or rents demanded) and slot twenty-seven million homes/residential plots into 26 bands (A to Z), each of which is about twenty per cent wide (i.e. the rental value at the top of each band is about twenty per cent higher than at the bottom of that band). Rather conveniently, this gives us a factor of one hundred between homes at the bottom of Band Z (the top 0.04% of homes) compared to those at the bottom of Band A (the bottom 0.07%), which is much the same relationship as there used to be for Domestic Rates.
2. The Citizen's Dividend/LVT credits
Let's also assume we replaced the entire welfare system and the basic state pension with a flat rate CD, of about £70/week for adults, half as much for each of the first three children and twice as much for pensioners.
This will be non-taxable and non-means tested etc, but not entirely unconditional (you'll have to tell them your main address, for example) and will be first offset against each household's LVT bill before any excess is paid out.
So each household receives one single form each year (or every time they move) stating what the LVT bill for that home is and asked to fill in details of how many people live there (easily cross referenced to the electoral roll, NI records, bank accounts for adults; and child benefit payments, GP registrations, school attended for children), which reduces their LVT bill accordingly (or leads to a net refund).
3. A subsequent purchaser is paying the correct amounts
I can see how current owners will cry foul, you're changing the rules halfway through the game etc, but this does not apply to people who buy a home once LVT is in place. The price they pay will be adjusted down (or up) to take into account the tax bill, and so the price will be 'correct' bearing in mind the net tax bill, and hence the net tax bill will be 'correct' bearing in mind the price paid for the house. This applies to down-sizers as well as first time buyers. That's free market economics for you!
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So let's imagine we are halfway there (monstrosities like VAT and National Insurance having been abolished, as well as Council Tax, SDLT, IHT and so on) and are collecting equal amounts in Domestic Rates and a flat income/corporation tax. This works out at about 4.2% of the current selling price of each home (minus a bricks and mortar allowance of £50,000) and 21% flat income/corporation tax.
i. Each household is paying a slightly arbitrary figure in LVT and receiving a slightly arbitrary amount in CD. Of course this is all slightly arbitrary, we're talking about a tax/welfare system which has to accommodate 62 million people in 26 million different households.
ii. The fact is, even at this level of LVT (and assuming no down-sizing etc), fewer than 6 million UK households out of 26 million will be net LVT payers, and the total net LVT collected from them (i.e. LVT minus LVT credits) will be about £73 billion.
iii. Now, some people will not be happy with the banding system and will descend on the Town Hall bearing armfuls of comparatives to support their contention that the rental value of the plot (i.e. the rental value of the house minus maintenance and running costs) is lower than the slightly arbitrary figure stated.
ix. For sure there will be such houses, in which case we abandon the arbitrary netting off of two slightly arbitrary figures and agree a more specific and precise figure, but by the same token, such refuseniks can whistle for their equally arbitrary LVT credits ("Don't pay, don't get" is my motto).
x. So let's take a single working age adult rattling around in a band K home, just about into the top ten per cent of homes with a gross LVT bill of £11,000*, he gets his LVT credit of £3,500 deducted and his net bill is £7,500. It's up to him to show that the net rental value of his plot (after deducting costs, maintenance, depreciation, letting agents fees etc - bank interest is not a cost, it is a profit-share between the BTL landlord and the bank) is less than £7,500 a year, which will be just about nigh impossible (the current gross rental value of such homes is more like £12,000 to £15,000 a year).
xi. Maybe the bloke at the town hall is in a good mood and he cheerfully agrees a rental value of £6,500 a year, so what? That's then binding on both parties (but not on future purchasers) and goes on the public record, I am quite sure that somebody somewhere will be able to check whether a brown paper envelope full of cash might have changed hands. Potential tenants will also use this as evidence to support lower rents so local letting agents and landlords (who know best about this sort of thing) will be more than keen to argue rental values up again.
xi. Unlike most people, I used to be a BTL landlord and I am now a tenant and I know for a fact that the actual running costs are bugger all, probably about a fifth of the gross rent collected over the longer term, the rest is pure profit i.e. land rent.
* Bayard challenged this figure in the comments. I replied that an easy way to work this out is to compare the annual rent for a bog-standard 3-bed semi-detached or terraced house in the area under consideration with the annual rent for a similar bog-standard 3-bed semi-detached or terraced house in a marginal location, i.e. pretty near the bottom.
I checked on Zoopla, and the rent for such a house in the postcode district at the top of the lowest decile is about £500 a month (of which only a small part is land rent) and the rent for such a house at the bottom of the top decile is about £1,300 a month, so that means that the land rent element of his house, under current rules, is at least £9,600 a year. Once VAT, NIC and higher rate tax are phased out, not to mention Council Tax or CGT, this differential will easily widen to £11,000.
The Fart of Doom
4 hours ago
7 comments:
"after deducting costs, maintenance, depreciation, letting agents fees etcthe actual "running costs are bugger all, probably about a fifth of the gross rent collected over the longer term, the rest is pure profit i.e. land rent"
AFAICS, "the rest" is the net rent of the house and plot, not the land rent. After all, if there is not a house on the plot, you won't be able to rent it for what you'd get for the house after deducting costs, maintenance, depreciation, letting agents fees etc.
It's not difficult, as you know, to work out the relative values of the brix'n'mortar and the plot. You also know what rental value is of the house and plot together, so from there it's fairly easy to work out the rental value of the plot only. Given your bloke in his house worth £13.5K a year in rent, and a, say, 80/20 split between plot and building, the net rent for the plot (after deducting 10% for expenses, nearly all of which will be letting agents' fees) will be £9,720, so the LVT would be more than 100% of the land rent.
B, let's not split hairs, I was illustrating the general principle.
What you call 'the rent of the brix and mortar' I call 'depreciation'.
Whatever algorithm we use to crunch numbers, the actual extra rent he can get for a house in reasonable condition on that plot in a top decile area, compared to an identical house in reasonable condition in a marginal area will be at least £7,500 a year (£650 a month), it's only the net tax bill of £7,500 which matters (the answer I first thought of).
B, as a reality check, you can look up for yourself the typical rent for a bog standard 3-bed semi or terraced house at the top of the bottom decile (which happens to be BD8) which is about £500 a month.
The typical rent for a more or less identical bog standard 3-bed semi or terraced house at the bottom of the top decile (which happens to be IG5) is about £1,300 a month.
So the land rent element in IG5 is clearly £9,600 per year under current rules. Once we've got rid of VAT, NIC, higher rate income tax, council tax and so on, that gap will easily widen to rather more than £11,000.
I rest my case.
Calculating LVT that way gives me a putative tax bill of £5,000 a year, which is a lot less than previous calculations based on area have yielded. If there were to be a CI of £3,500 a year, then I'd end up paying less tax than I do now. (I calculated that, down here, the land element is about 25% of the rent).
B, there are of course different ways of calculating it, none of them are perfect to start with but they all would tend to level off at the same £ amounts after a few years.
For example: the area calculations work fine for urban areas but are not really so appropriate for houses out in the countryside which might have massive gardens (where the size of the garden has little or no relation to the selling price or rental value of the house). I've also used 'a percentage of current capital values' as a proxy for actual rental values, and so on, you can do it with or without banding, with or without averaging, with a smaller or larger bricks and mortar allowance, and so on.
"I've also used 'a percentage of current capital values' as a proxy for actual rental values"
Back in the 90s, a landlord told me most landlords worked on 6%, but prices have risen so high since then, closer to 4%, as you say, sounds about right.
However, any letting agent worth their salt should be able to fix a rental value for any property, after all, he would have to if the owner asked him to let it for him. No need for the "army of surveyors".
B, round where I live, you could get over 12% gross return in the 1990s. Since then, prices have trebled and rents only increased with wages and so returns are now (say) 5%, of which four-fifths is land rent.
Nonetheless, having some sort of fairly crude banding approach obviates the need for the 'army of surveyors', and prices would adjust up or down accordingly, so after a couple of iterations, the tax would be much the same proportion of the land rent everywhere.
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