Thursday, 26 January 2017

Sounds like a job for LVT-man

Vie MBK from The Telegraph:

The vast majority of houses were sold under freehold, traditionally, while flats were leasehold. The latter puts owners at a disadvantage, exposing them to the whims of the freeholder.

But now houses, as well as flats, are also being sold with leases. Homebuilding giants such as Taylor Wimpey, Bellway and Persimmon then sell on the freehold as an extra source of income.

Telegraph Money has previously highlighted the plight of Taylor Wimpey homeowners whose leases include provisions that can mean ground rents double every decade. As well as the growing cost of paying ground rent, such terms cut the value of the property.

Admittedly, you have to worry about the naivety of some people, but LVT-man will sort it out.

I've explained this before when people advance the KLN: "But what about leasehold flats? How do you apportion the LVT bill between leaseholder and freeholder? What if there is a head lease and then sub-leases and sub-sub-leases? It's all very complicated!"

No it's not.

We know what the location element of the rental value of any flat is, regardless of chain of title. Let's say median £5,000 a year or something. If the leaseholder with immediate right to occupation has to pay £500 a year in 'ground rent' (i.e. privately collected LVT), his LVT bill is reduced to £4,500 and the freeholder gets an LVT bill of £500 (if LVT rate is less than 100%, the bills are scaled down proportionately).

If there's an intermediate leaseholder, receiving £500 per flat in a block and paying £200 per flat to the superior interest, his LVT bill is £300 (or whatever percentage) per flat, and so on.

This would pretty much demolish the value of the freehold reversion and any intermediate leases, making it easier for tenants to enfranchise, transferring the liability from the freeholder to the newly enfranchised tenants.

If the builder has played clever buggers and wants more ground rent than the LVT value, he just pays tax on what he actually asks for and the tenant has a zero LVT bill.

If a freeholder wants to sell the freehold reversion as an "investment" or lets tenants enfranchise, LVT would be levied on the entire proceeds (paying several years' tax on several years' income received up front). The investor or tenant can then amortise the appropriate part of the cost* against their own future LVT bills. So the greedier the freeholder is, the lower the future LVT bills for subsequent 'investor' or newly enfranchised tenant.

In these cases, an LVT rate of 100% would be ideal because it would make the whole exercise pointless from the point of view of the cynical land speculators and piss taking freeholders.


* The next 'investor' or tenant is paying for two things - a) the NPV of the ground rent income until the lease expires, which would be an allowable deduction for LVT purposes, and b) the value of the freehold reversion, which would largely relate to bricks and mortar and hence be irrelevant for LVT purposes. We can work out the value of a) very easily and arrive at b) by subtraction.


Ben Jamin' said...

Why not just send the freeholder the whole bill for the 100% LVT, on the understanding they can raise ground rents, but not above that figure?

They'd still own the bricks and mortar. If that's not worth the effort and they throw in the towel so what? Give the title to the leaseholder. If they don't want it the State can dispose of it after the lease expires.

Bayard said...

"Admittedly, you have to worry about the naivety of some people,"

It is tempting to think, more fool them for not reading the small print, but people do rely on solicitors to do that sort of thing, and the quality of legal services can be very poor indeed, no doubt with the offending lawyer secure in the knowledge that it is difficult and expensive to sue a lawyer.

Still, you would have thought they might have wondered, "why is this house so much cheaper than a freehold one?"

Physiocrat said...

There are two ways of dealing with this. One is that set out in the London Rating (Site Values) Bill 1938, of which a formatted pdf is available for downloading from the Land Value Taxation Campaign's website. This is an important piece of draft legislation as it remains a template for new legislation. In the 1938 Bill, responsibility for payment was on the leaseholder of one year or more.

The alternative method is to bill the freeholder, who would be allowed to apportion the charge to leaseholders.

There are some very long leases, especially in London. Wigmore Hall is on a 250 year lease from Howard de Walden Estates. They paid a six figure sum when the original lease ran out about ten years ago. For what, you might ask. That will run out around 2260. There is nothing like planning ahead, is there?

Mark Wadsworth said...

Bj good idea, but involves endless rewrites of private contracts, so a gold mine for lawyers.

B, I'm as baffled as you are.

P, I've read it, it's not very clear at all. Even by the standards of tax legislation.