Killer Arguments Against LVT, Not (490)

One objection that often floats about is that while you can establish reasonably reliable relative values for generic types of land and buildings - urban homes, factories, offices, retail premises, farmland etc, there will always be a few outliers.

I agree, things like stately homes and theme parks in the middle of the countryside (or ski-runs in the Cairngorms or whatever outlandish examples people come up with) aren't bought and sold very often. It's difficult to say what they'd sell for or rent for, and how that would be split between building value and location value.

So what?

Even with conceptually simple taxes like income tax, there are endless grey areas. Who is and isn't UK resident? Where's the line between a gift out of gratitude and a payment for services? What's a taxable dividend and what's a non-taxable return of capital? If a shareholder also works for a company, is the money they get from the company dividend, wages or a loan?

There are thousands of pages of legislation, guidance and legal cases on all these issues; it's sometimes impossible to understand why a Tax Tribunal decided that somebody's receipt from a certain source was taxable or not, and sometimes they decide the opposite way round to what you'd initially expect, given the basic facts. But they are the Tribunals and I'm not.

Nonetheless, the bulk of what you'd think is taxable income is actually taxed; some people wriggle through loopholes; others have to pay tax on stuff where the sensible person would assume it's non-taxable. Some tax is never paid and HMRC just writes it off. Overall collection rates about 90% of theoretical receipts. And we accept this as 'good enough'.

Conversely, LVT assessments for 98% of land by value are a doddle i.e. developed land in urban areas where there is plenty of data on rents and selling prices. Farmland is about 2% by value, that's not too difficult either (the tax would be tens of pounds per acre per year at most, unless we just exempt it). And collection rates will be very high - who cares where the owner lives? If they run up massive arrears, the land and buildings just get auctioned off and they get the balance.

As to stately homes and theme parks, valuers just have to make up some general rules or haggle on a case-by-case basis. If they end up getting the benefit of the doubt and are under-taxed, so what? Most of the stately homes which the National Trust owns were given away by owners who couldn't afford the running costs, and even with their membership and entry fees most of them aren't particularly profitable, so they can't be worth much, possibly next to nothing i.e. not worth taxing.

Finding out the 'site premium' or 'site-only rental value' is ridiculously easy

I went to Rightmove and searched for 3-bed semi's to rent within a 40-mile radius of Leeds (a circle that includes, Manchester, York, Hull and Sheffield.

You can sort by price - cheapest first or most expensive first.

Comparing visually similar housese, the cheapest one is in Hyde Park, a fairly grotty part of inner Leeds:
The most expensive is this one in Altrincham, a super-posh suburb of Manchester: For sure, the expensive one might be a bit tidier inside (the front garden certainly is), but the bulk of the £1,305 difference is 'site premium'.

You can do similar comparisons for all different categories of homes (different sized flats, terraceds, semi-detacheds, detacheds etc), then do a bit of data smoothing, interpolation and extrapolation and Bob's your uncle.

As far as I can see, the size of a back garden has little impact on rents or selling prices (as opposed to front gardens, which are good for privacy and off-street parking), so drive-by valuations tell you everything you need to know. One person drives and the passenger just puts a tick in the appropriate 'Band' column for each house or door number.

Killer Arguments Against LVT, Not (473)

Physiocrat reminded me to dismantle the Scottish Land Commission - Investigation of Potential Land Value Tax Policy - Options for Scotland - Final Repor.

A lot of it is fairly positive, but they are in a muddle on valuations, making it seem far more difficult than it really is, probably deliberately or perhaps out of intellectual laziness.

From page 30:

Land needs to be valued. This should ideally be undertaken using the comparison approach i.e. by analysing market evidence of comparable land sales. However, evidence of undeveloped land may be scarce.

The alternative is to use an approach whereby evidence of the value of land and buildings sold or rented as an ‘entity’ is analysed to extract the value of the land.

This is not 'an alternative', this is how it's done. The site premium of the few plots of bare land in urban areas is inferred from this (assuming in same area with same planning).

Undertaking this can be problematic as the ‘residual’ method, whereby build costs and other adjustments are subtracted from the total value of the development to arrive at a ‘residual’ land value, can produce confounding results...

We should be using rental values, not selling prices, but for the initial valuations, it's good enough.

... For example, take two dwellings side-by-side. One is three-storey and developed to highest and best use (market value = £1m, build and other costs = £0.5m, so land value = £0.5m), the other is two-storey (market value = £0.7m, build and other costs = £0.3m, so land value = £0.4m).

The land value (and therefore the LVT) of the first property is higher. The relationship between property value and build cost is penalising the development of land to highest and best use, which is counterintuitive as far as a land value tax is concerned.

Initial valuations can be based on actual use, as this is a good proxy for 'optimum permitted use'. At the time any building was built, it probably was the optimum permitted use.

That might change over time, but only gradually; if nobody's applied for change of use on his own plot, we can reasonably assume that the current owner considers this still to be the optimum. If somebody build a larger home ab initio; or bought a smaller home, knocked it down and built something bigger; or bought a smaller home and built an extra storey, that is clearly his opinion of optimum use.

Whose opinion is a better indicator? Nobody knows. Does it matter? No. Valuations are always going to be a bit arbitrary, what matter is consistency of approach.

1. We shouldn't ignore the past and what's already there, so we could just assess the smaller house plot at £400,000 and the larger house plot at £500,000 and have done with it.

Similarly, we shouldn't ignore demolition costs and hassle (as the report does) and practicalities. What is the optimum permitted use of the smaller home? It's probably "leave it as it is".

If you want a larger home on that street but none are for sale, you could buy a smaller one for £700,000, knock it down at a cost of £50,000; build a larger home for £500,000, you've ended up spending £1.25 million for a home worth £1 million, which ain't going to happen. So £400,000 is still a fair assessment.

2. Or maybe you can just buy a smaller home and spend £150,000 on an extra storey; half of the value uplift from £700,000 to £1 million. In which case, if it's a mixed street with equal numbers of easily extendable smaller and larger/already extended homes, it makes sense to assess them all at £450,000. If there are ninety smaller homes and only ten larger ones, assess them at the weighted average of £410,000.
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Whichever method is chosen, it will be good enough for initial assessments (I am heartily indifferent), and the % rate would simply be based on the total revenue required to replace existing taxes are replaced, so not huge £££ amounts. Over time, we can be a it more sophisticated; use rental values not selling prices, and so on.