Land Value Capture in the UK

Land value capture is the practice of capturing a part of the increase in land value stemming from public investments or changes in land use regulations and using the new value to finance public infrastructure and services. In the UK, land value capture has been proposed to fund infrastructure projects, such as new transport links, affordable housing, and community facilities. The aim is that the government would capture a portion of the increase in land value that results from these projects, either through taxes or other mechanisms, and use that revenue to reimburse for the infrastructure.

The Need for a Well-Functioning Land Value Capture System

A well-functioning land value capture system can ensure new infrastructure is appropriately funded, including new housing projects. However, in the UK, there is a general feeling among political parties and the public that housing and planning markets are not ideal for land value capture, as they do not serve the common good and are not delivering the housing needs and expectations of potential new homeowners.

Landowner Benefits and the High Cost of Land

UK landowners have pocketed many benefits from the investments that taxpayers and others have made in infrastructure and other development. The privileges granted by the 1961 Act have been grossly misused, which has resulted in the high cost of land in the UK and inhibited growth in housing provision. High land costs have contributed significantly to the existing housing problems in the UK, with quality housing being beyond the means of most families on the average income.

The Impact of High Land Costs on Housing

Consequently, families have to compromise and live further from their work, resulting in some of the highest average commuting times in Europe. As well as being priced out of living within a reasonable commute, most people in the UK also have to live in poorly insulated homes, due to the aging UK housing stock.

The Uplift in Land Prices with Planning Permission

It is pretty much an undisputed fact that agricultural land becomes several times more valuable after it is granted planning permission, even before any construction takes place. The value of farmland post-residential permission has increased nearly 100 times due to the grant of planning permission compared to just a few years ago.

The Potential for Capturing Land Value to Build Affordable Homes

The theory is that if such uplifts in land prices could be captured (at least partially), then the government could use the additional funds to build nearly 100,000 affordable homes annually, along with associated infrastructure. Meanwhile, housing associations and Build to Rent funds across the UK find it challenging to locate land for new homes for social housing and rent, respectively. Private developers construct fewer affordable homes as their model is to build premium homes and sell them high to cover high land values.

Bidding for land is highly competitive, and it is hard for private developers to compete with housing associations that have lower borrowing costs and access to higher densities, council land, and various grants and subsidies. Finding enough sensibly priced land is becoming increasingly challenging for all.

The National Housing Federation and the Centre for Progressive Policy have urged the UK government to consider reforming the land purchasing and selling process to help tackle the housing crisis. They suggest that the law should allow public bodies to capture the increase in land value when it is granted planning permission. This money could then be used to fund infrastructure and social housing, which are now critical requirements.

Depending on when such a tax becomes payable, there may well be an impact on developer land banks. It is not necessarily fair to criticize a land bank at face value: the planning system often sees developers getting initial planning permission that may be unviable, only to have to go back and improve it, which leads to delays. Also, developers can only release a certain amount of product at a time to avoid devaluing it, and every market has a saturation point. Developers are also constrained by the level of labor or supply chain availability.

Others argue that the tax would drive land toward developers with the necessary resources and would drive down prices. Given that most major land deals quote a strike price and pay away to the landowner (often for farmland), the tax could fall on the right side of the fence and prevent a few farmers from becoming overnight millionaires.