Let's do another easy two-parter from here:
---------------------------------
"Let's imagine a pensioner living in a modest London 2 bed semi worth £1m in which they spent her entire adult life. At what point can she begin to defer the tax? What happens when the outstanding tax becomes greater than the value of the land/property? What happens when she needs to move to a care home?"
If somebody has £1 million to invest and no other sources of income, and chooses to spend it all on a "modest London 2 bed semi" they need their head examining. You can't help people prepared to make crazy decisions like that. They could buy a rather nice 3 bed semi (or a huge flat) a few miles further out of town for considerably less than half that amount, for example, and invest the rest of the money in something that generates a cash income - if you get the split right, the cash income is enough to pay the tax and leave you plenty left over to top up your Citizen's Pension.
In any event, the only way that LVT will ever fly, politically, is to give pensioners exemptions, discounts or a deferment option.
---------------------------------
"Nobody proposing this tax has managed to explain how it would operate on leasehold properties. This is quite an important point which you would expect to be mentioned if those who propose it are serious and have thought the concept through. Does the landowner pay, or the leaseholder? Is the market rental rate for the land based on actual realised ground rents, or those in the market? These are two very different figures, especially for a building that has 50+ years left on the lease in an area that has seen huge growth in the property market."
I have explained it many a time, it is quite simple. We work out a rate per square yard for each area, let's say it's £24 in the median residential area*. So a house on 500 sq yd plot pays £12,000 a year tax**. From there on in you just apply commonsense.
Maybe next door is a 833 sq yard plot, with a block with four leasehold flats. If the leaseholders also own the freehold, then clearly they split the tax a quarter each (assuming flats similar size/value) and pay £5,000 a year each.
If the freehold is owned by somebody else, he is liable to pay the tax but can pass on the appropriate element to the leaseholders as follows:
Four flats worth £75,000 each = £300,000
Freehold worth £40,000
Total value of site with building = £340,000
LVT bill 833 sq yards x £24 = £20,000
Pro rata tax on each interest = £20,000/£340,000 = 5.88%
The owner of each flat then pays £75,000 x 5.88% = £4,412, and the landlord pays £2,352.
"Aha!" cries the nay-sayer, "I accept that the market value for the flats will be reasonably easy to establish, but who values the freehold reversion?"
Answer; The freeholder does. So in the above example, he's perfectly entitled to value his freehold at £5,000, in which case the tax rate is recalculated at 6.56%, and the tax on each flat goes up to £4,918, and the tax on the freehold goes down to £328
"Aha!" cries the nay-sayer again, wrongly sensing victory, "Seeing as how you LVTers hate landlords so much, doesn't that mean you've shot yourselves in the foot - the freeholder could just say that his freehold reversion is only worth £1 and end up paying virtually nothing!?"
Firstly, LVTers don't hate anybody, secondly, don't forget about the right to collective enfranchisement under the Leasehold Reform etc Act 1993. The value that the freeholder places on the freehold reversion in order to apportion the LVT bill will also be the price that the leaseholders have to pay him should they wish to acquire it. So if the above freeholder says it's worth £1, the leaseholders can enfranchise for 25 pence each.
Simples.
-------------------------------
* I worked this out by applying local knowledge, and just for a giggle, selecting a few postcode sectors at random and dividing actual recent selling prices from houseprices.co.uk by apparent plot sizes from Google Maps. The other way of guesstimating it is to take our required tax take of £300 billion**, and dividing it by the total area of developed land excl. roads and railways from the Generalised Land Use Database, which is about 2.9 million acres, which gives us an even more modest £21.37 per sq yard.
** Which would be the required tax rate to replace all other taxes, income tax, VAT, Council Tax, the lot, assuming most of the waste in government spending were eliminated.
Doppelgänger
1 hour ago
16 comments:
As someone who's economically literate, left-ish-considering-that, and so frequently argues with lefties on economic issues, I thought I had a hard job. But the sheer head-wall-banging that you face on LVT makes me genuinely despair for the future of humanity.
The "declared value = entitlement to buy" aspect is so simple, delightful and brilliant, that I'm almost convinced it'll never happen on the grounds that nothing that straightforward ever happens.
JB, thanks.
Er how many of these are there going to be, Mark? :)
JH, out of all housing in the UK, about twenty per cent is flats etc, which are predominantly social housing (where there is no need to split between location rent and bricks and mortar rent - the council can just collect as much as possible).
So maybe ten per cent of privately owned housing is leasehold flats, and the average number of flats per plot is (say) five, so there are about 400,000 such plots in the UK.
We'll do the land value averaging individually for each postcode sector, of which there are 9,650, i.e. about 40 such plots in each sector.
So when the VOA and/or HMLR do the valuations, they have to send off forty extra forms for each sector asking the freeholder to submit his valuation.
This number then:
a) Goes into the pot when working out the total value of all land and buildings in each sector, and
b) Is made available to the leaseholders for them to make their own decision on whether they'd like to enfranchise at that price.
If the form is not returned by the deadline, then the market value of the freehold reversion is assumed to be £1 for purposes of a) and b).
Like I say, it's easy if you apply common sense.
Mark, to be fair, the original commentard did say "in which they spent her entire adult life." (which I take to mean "in which she spent her entire adult life.") which would mean that the two-bed semi would have been bought in the mid to late 60's and cost her and her husband a few thou. She might even have inherited it.
B, so the lady bought the house when it was still liable to Schedule A tax and Domestic Rates?
So what's to complain about if these are reintroduced? (OK, Sch A was scrapped mid-1960s but let's gloss over that). Either way, she is sitting on a hitherto largely untaxed and entirely unearned gain of £998,000. And as I have said before, let's completely circumvent the tedious Poor Widow Bogey by just exempting pensioners.
----------------------------
I'm suggesting LVT of about £80,000 a year on that mythical £1 million 2-bed semi, and no other taxes.
Compare that with the current rules - somebody who wants to buy it, would have to have saved up £200,000 out of post-tax income (£400,000 gross) and takes out a mortgage of 4 x gross annual salary £200,000 = £800,000 to pay for the rest.
They are paying about £90,000 a year in tax to the government (income tax, VAT, NIC etc) and paying about £50,000 a year in privately collected tax (mortgage payments) to the bank = £140,000 a year.
Land will never be a truly free market, but at least LVT levels the playing field between buyers and sellers - and what's wrong with a system whereby the wealthiest people end up in the nicest houses (and of course pay the most tax)? It's hardly revolutionary, is it?
If and when our Poor Widow pegs it, who do you think is going to buy that house? A very high earner, of course - all LVT would do is speed up the process a bit.
It is 'unfair' that a Little Old Lady just sitting in her house, which she cares not what the value is, has to pay a shed load more tax, just because gummint policy and the homeownerists love House Price Inflation.
Methinks that LVT will actually precipitate a levelling off of such inflation, since all the market gain (the beta) will be captured by LVT.
Overall then exempting the current over 65's from LVT, but making that a wasting allowance, that dies out with the current generation would seem to be 'fair'.
L, seems fair to me, just exempt pensioners. All a bit rough and ready but counters 90% of standard Killer Arguments.
And as to those poor unfortunate low income people who all seem to have inherited a £1m house, let's do a compare and contrast:
If you're a low income person and you inherit a yacht from a distant uncle which is worth £1 million and is moored at the swankiest marina in Europe at an annual charge of £100,000. It's your choice - moor it elsewhere for less; pay up because it's worth it or just sell the yacht and spend the money on something else.
So the current idea is postcode areas, and a LVT charge based on the average of sale prices (on a square footage basis) within that area?
Not necessarily the fairest valuation system is it? By definition the most expensive (in square footage terms) properties will pay less (being above average) and the cheapest pay more (being below average).
If all postcodes were of a homogeneous property nature it might make sense. But owners of small houses/flats in wealthy areas will end up paying more, relatively speaking, and the mansions less. In rural areas a postcode can cover a mile or more of houses of many different types. Farms, cottages, rectories, manor houses, new 2 up 2 down developments, all within the same postcode.
Plus such a system takes no account of the value of planning restrictions (some houses can have restrictive covenants which reduce their sale value), or be able to value areas that are rarely if ever sold (council houses/housing association houses), lower valuations due to construction methods (many houses were built post war using concrete sections, and it's nigh impossible to get mortgages on them, thus reducing prospective purchasers to cash buyers only), or low valuations due to construction issues (subsidence/ dry rot/ rising damp) which can all reduce the value of a property well below its similar neighbours. Flood risk can affect one property and not its neighbour, having a big effect on value. And so on and so forth.
LVT has a simplistic appeal if you say 'You pay x% of the value of YOUR house in LVT' People can see the fairness in that. Introduce averages and you create winners and losers, which makes the whole thing even less likely to fly.
Mark, my remark wasn't about the unfairness of LVT, just that the probability was that no-one had invested £1M in a two bed-semi, they'd invested a few thou many years ago, but that's not trying to excuse the illiteracy of the comment; it's not the poor widow that's complaining, it's some idiot complaining on her behalf.
S, LVT is a tax on land (i.e. location) values, not the value of discrete units of land+buildings.
So in theory, when valuing any one plot, you imagine that the building wasn't there and then value the plot.
1. So if your house is kept in tip top condition and your neighbour's is riddled with dry rot, you aren't penalised and he isn't rewarded.
2. For sure, there are some postcode sectors which could be more conveniently split up into two or three separate value bands (those prone to flooding vs those on the hill; or those with a nice view against those without) but these differences within smaller areas are far less noticeable than the differences between different regions.
In any event, for 90% of developed areas, the tax per sq yard would be between £20 and £100, i.e. the rate is fairly flat. And for every loser there is a winner.
And you've completely lost me with this bit:
"By definition the most expensive (in square footage terms) properties will pay less (being above average) and the cheapest pay more (being below average)."
???
I know from my street that the houses on big plots (500 sq yards) sell for twice as much as the houses on small plots (250 sq yrds). So we end up with a surprisingly 'fair' result at a minimum of administrative hassle.
And with this comment you are completely on the wrong map:
"such a system takes no account of the value of planning restrictions (some houses can have restrictive covenants which reduce their sale value),"
99% of restrictive covenants date back to when the estate was built, and every single house in the estate (or flat in a block of flats) has the same RC's. Of course a RC on your house reduces its value, but the RC's on all your neighbour's houses increase the value of your house - it all cancels out nicely!
B, usually you'll find it's the potential heirs doing the complaining :-)
S, just to continue, you refer to "areas that are rarely if ever sold (council houses/housing association houses)"
Why does it matter what these are worth? We can take them out of the equation entirely. In a sane world, the council or housing association would be be collecting as much rent as they can from these buildings - and by definition, a full market rent = bricks and mortar rent + location rent, and location rent is in £ terms exactly the same as LVT.
"By definition the most expensive (in square footage terms) properties will pay less (being above average) and the cheapest pay more (being below average)."
What I meant was (and I wasn't very clear I admit) that in an average based valuation system, the highest priced houses in the area will end up paying less than their true valuation and the lowest, more. If I own the nicest house in the postcode, with the highest cost per square foot) I won't pay LVT on that value but a lower one. And vice versa if I own the cheapest house in the postcode. Thus the poorer households subsidise the richer.
Given people hate relative unfairness more than absolute unfairness, this will not be popular!
And with regards to the valuations, you said in the OP that you'd taken sale prices for certain postcodes and plot sizes to arrive at an average valuation per square foot. Such sale prices do take into account the condition of the house, not just the underlying locational value of the plot. So the points I made on that basis are valid.
If you want to arrive at an average value per square foot that is for the land only, each plot would need to be valued individually - taking us back to the massive valuation bureaucracy you seem to be trying to avoid.
Sobers said:
If you want to arrive at an average value per square foot that is for the land only, each plot would need to be valued individually - taking us back to the massive valuation bureaucracy you seem to be trying to avoid.
Even if every plot was to be valued (and surely they already do that for the Council Tax or UBR) the massive valuation bureaucracy required is still tiny in comparison to the truly gigantic bureaucracy required to calculate income tax or the even larger bureaucracy required to track VAT.
Don't be fooled by the fact that a large part of that bureaucracy is actually employed by the private sector to calculate and report its own tax liability. At least with the property taxes, the cost of collection is easily visible because the evaluators, investigators and collectors are nearly all directly employed by the government. With the other taxes only the investigatory and collection branches of the bureacracy are visible as direct government employees. However the accountants and computer systems required by the private sector to keep track of VAT, PAYE and other tax liabilities are very much part of the cost of collecting taxes even if they are "off balance sheet" as far as the government is concerned.
And their numbers dwarf what is needed to collect UBR/Council Tax or would be needed to collect Land Value Tax.
S: "... in an average based valuation system, the highest priced houses in the area will end up paying less than their true valuation and the lowest, more... Thus the poorer households subsidise the richer.
"
Possibly. But...
a) In terms of tax collected, this would give us a far closer match to the current system (ever so slightly 'regressive').
b) You cheerfully ignore the Citizen's Income element, which makes the whole thing more 'progressive' and evens it all up nicely.
"Such sale prices do take into account the condition of the house, not just the underlying locational value of the plot."
Again, possibly. But we can safely assume that each area has a few run down properties and the bulk in very good condition, so we still end up with the correct relative values.
And don't forget that even if your house is in tip top condition, if there are a couple of run down properties on your street, it drags down the value of your house. So when calculating the 'location' value, the tip-top house automatically gets a discount if it is surrounded by run-down houses (and vice versa).
Hence on closer inspection, all these supposed problems just melt away - the fundamental point being that a typical semi in East Yorkshire is worth half as much as an identical house in Outer London, and that entire difference can be explained by the 'location' value.
D, exactly.
"Don't be fooled by the fact that a large part of that bureaucracy is actually employed by the private sector to calculate and report its own tax liability. At least with the property taxes, the cost of collection is easily visible because the evaluators, investigators and collectors are nearly all directly employed by the government."
Spot on sir, the time lost which could have been used for productive work is a significant factor here. The opportunity cost to the small business sector particularly is staggering to behold.
Post a Comment