Lay of the land
24 July 2006
When Gordon Brown announced plans for a planning gain supplement (PGS) in his 2005 pre-Budget report, the reaction was a collective groan. The PGS is essentially a tax on the rise in value that occurs when land is approved for a particular development. The property industry and tax professionals had seen similar developments of land taxes unfold on several previous occasions and knew how it always ended. Yet, where the PGS is merely ill-conceived at a UK-wide level, its specific effects north of the border raise serious questions over whether the Treasury has failed to recognise the practical realities of devolved government.
The crux of the PGS is that all developments will be subject to a valuation of the site immediately prior to the granting of planning consent, based on its current use as permitted by the planning system. A revaluation will then be conducted immediately after consent is given, with the differential land value taxed at an as yet unspecified rate. The property industry suspects the rate may be somewhere around 20 per cent of that differential.
On its surface the PGS appears to have good intentions, having been set in motion by the 2004 Barker Review of Housing Supply, which looked at strategies for delivering more housing and infrastructure to local communities.
However, the PGS goes well beyond the broadly straightforward proposition of assessing the hike in value that occurs when greenfield sites - farmland, for example - are granted planning consent. The PGS is intended to cover all forms of commercial development, including brownfield sites, where completely different considerations apply. In the case of most brownfield sites, the differential in value is significantly lower and the enormous costs involved in cleaning up the site, prior to implementing any consent, compress the net gain even further.
As valuation is inevitably a subjective process, the lack of detailed processes for reaching an agreed value on planning gain uplift for even relatively straightforward developments, let alone more complex brownfield sites, is troubling. Also, although the PGS is to operate on a self-assessment basis, the tax authorities will have a right to dispute assessments in the future, creating uncertainty not only in the development process, but also for the onward sale of sites.
Setting aside the problem of how values should be assessed, there is also concern over who should pay and at what point in the development process. Curiously, although one of the Government's aims is to put a stop to 'land banking', PGS will be payable only when development commences, even if the revaluation exercise was carried out when planning consent was originally granted. This could be many years down the line, during which time the land may have changed hands several times.
Naturally, the party who eventually undertakes the development will wish to factor the cost of the supplement into the price they pay for the land, passing that cost back to the original landowner. It is hard to see how this will serve as an incentive for landowners to stop hoarding - particularly in rural areas of Scotland, where property markets are already weakened, the price depression that could come with the PGS threatens to stifle much-needed development.
Another key aim of the PGS is to streamline funding for local infrastructure projects. Currently, in exchange for planning consent, developers are often required to deliver some sort of reciprocal gain back to the local community in the form of sports facilities for schools, for example. This mechanism, known as a Section 75 agreement in Scotland (equivalent to the English Section 106 agreement) ensures that the local community benefits from developments in the area. It also provides a degree of certainty for developers, allowing them to factor a rough cost into their appraisals.
The new approach, outlined in the PGS proposals, raises some potentially serious issues for Scotland, both practical and political. Instead of agreements between developers and local authorities, the PGS will ensure infrastructure funding is channelled through the Treasury. The Section 75 agreements would be restricted to matters relating specifically to the environmental aspects of the site and affordable housing.
As a planning function, this process of securing a portion of the planning gain to fund local infrastructure is clearly a devolved power, handled properly by the Scottish Executive. In addition, while the consultation document deals in some detail with Section 106 agreements, dialogue has only recently begun between the UK Government and the Scottish Executive over how the scheme will be put into practice north of the border. The outcome of these discussions remains uncertain.
These practical concerns regarding Scotland are far from esoteric. How, for example, will local infrastructure actually be delivered? Under the current regime developers have a clear understanding that, when they fund some specific piece of necessary infrastructure as a condition of planning consent, that benefit will be delivered. By writing out a cheque to the Treasury in Westminster - a portion of which will be put back into infrastructure - that vital direct link between the planning application and the community provision is broken, taking control out of the hands of the true stakeholders.
This leads to another potentially serious practical gap between implementation in Scotland and England. While regeneration agency English Partnerships could arguably act as a conduit in delivering infrastructure south of the border, there is no equivalent in Scotland. Perhaps this is yet another role for Scottish Enterprise, which is already under pressure to perform a vast array of functions.
It is tempting to view the PGS as empire building by the Chancellor, with little consideration given to the possibility that things might work differently in Scotland. We have been assured that the supplement will raise more money for infrastructure projects than Section 75 agreements, but it is hard to see how extra bureaucracy and centralisation will help ensure this money is spent efficiently and to the mutual benefit of local communities and developers.
If and when the PGS is implemented, there needs to be careful consideration of exemptions - community 'right to buy' projects, wind farm and minor works, for example. Clear transitional rules will also be necessary to cover situations where land is already under contract prior to the introduction of PGS. Major developments, which may last 10 or more years, may require a series of planning consents granted over a period of time, each of which will attract a PGS payment, which has to be resolved and factored into the appraisal process.
The PGS will require a great deal more detail - and arguably revision - if it is to meet its goals. However, there are alternatives. A number of leading figures in the property industry have suggested some form of planning 'tariff', such as Milton Keynes' 'roof tax', which was administered successfully via English Partnerships. Instead of negotiating Section 106 agreements, housing developers pay a flat rate of £18,500 per home built, regardless of its size, with commercial developers paying at a slightly different tariff. English Partnerships effectively 'forward-fund' these arrangements to cover the potential gap between expenditure being made on infrastructure and the funds coming in from developers. The scheme enables developers to identify costs accurately and hence to factor that in to their appraisals.
Responses to the PGS consultation are in and it remains to be seen how matters will progress. In the meantime, Scottish property businesses, their professional advisers and the devolved government will need to start preparing for yet another policy-driven initiative where Westminster elects to legislate now and think later.
Iain Macniven is a partner in the property department of Maclay Murray & Spens