Guest blog: Development value taxes: dispelling the myths

The government has committed to delivering 1.5 million new homes during this Parliament. Achieving this target is likely to rely on increased community consent. But community consent depends on there being adequate mitigation of developments, including through the provision of new infrastructure.

Landowners often enjoy a windfall gain in the price of their land when planning permission is granted for development. They are therefore sometimes asked to contribute to the cost of mitigating the impact of development through so-called 'section 106 agreements', which are negotiated, and a Community Infrastructure Levy (CIL), which is not. These tools together are estimated to generate in-kind and cash payments worth around £7bn annually. However, they also have been the subject of much criticism, partly because most developers pay nothing and partly because (if they are insensitively applied) they risk preventing the development from happening at all. So, in recent times, both Labour and Conservative governments have searched for alternative taxation tools which would widen the tax base, while also being more proportionate to the actual windfall gain.

The traditional narrative of failure

Whenever any more comprehensive taxation of development gains is suggested, commentators are quick to point to the rather chequered history of previous attempts. Indeed, since 1945, there have been four national development taxes in the UK, all of which were repealed relatively quickly.

Over time, a broad consensus has developed about the reasons for these failures. It is typically claimed that, even though the theoretical case for such taxes is strong, they were failures in practice. High headline tax rates and complex rules are said to have created serious land market distortions, which were exacerbated by a lack of political consensus over the taxes (leading to expectations of repeal). It is alleged that landowners responded either by withdrawing large amounts of development land from sale or by passing the cost of the tax on to buyers of development land. This is said to have inflated land and house prices. The taxes are also thought to have been publicly unpopular, and to have raised little money.

But is this narrative true? To find out, new University of Cambridge research has analysed 130 commentaries on the failure of at least one of these taxes, each written between 1949 and 2023. This is the largest such review ever undertaken on this topic; but it found little concrete evidence supporting the narrative outlined above. The consensus may be broad, but it is also alarmingly shallow, a shallowness which seems to arise mainly from later researchers relying on unevidenced assertions made by their predecessors, who sometimes repeated an unevidenced case for repeal made by the repealing government.

Scarce data on land market effects

For example, researchers commonly assume that the government which introduced each tax, and the later government which repealed it, had analysed data about the land market effects of the tax, and made decisions accordingly. But no such data has ever been located. Indeed, in announcing repeal, the repealing government supplied no meaningful analysis of adverse market effects at all, and researchers have added little quantitative evidence since. Most of the 130 studies contain no land market data, let alone any statistical analysis, and little systematic assessment of landowner opinion. In short, claims about how landowners behaved, and how they weighed the impact of these taxes against other factors in the decision to sell land for development, are largely speculative.

Did landowners play the waiting game?

It is often claimed that Conservative pledges to repeal the taxes aggravated these land market effects by giving landowners a further reason to wait. Certainly, the Conservatives aggressively objected to, and promised rapid repeal of, the wider land policies of which Labour’s taxes were a part – namely, the 'socialist' Land Commission and the 'communist' Community Land Act. And the fact that earlier development taxes had been repealed may have increased expectations that later taxes would also be axed.

But in fact the Conservative party leadership has almost never promised repeal of a development tax in advance. Conservative commitments to radical reform or abolition were more usually conspicuous by their absence, at least in the early years of each tax. Even later commitments were usually limited to vague promises of 'review' or 'overhaul' which appeared to accept the principle of taxation.

This studied ambiguity no doubt reflects acute Conservative awareness of periodic public concern over soaring land prices, which often led them to support development taxes. For example, in 1973 they imposed a hefty one themselves – the Development Gains Tax. And after Labour introduced Development Land Tax in 1976, at a 66-80% rate, the Conservatives simply called for a lower rate of 50-60%. When the Conservative government did reduce the rate to 60% in 1979, they explicitly ruled out any further cut. Claims that landowners sat on their hands waiting for a repeal or further rate reduction are therefore rather doubtful. And no land market data has ever been published which shows that they did.

These few examples are drawn from a much wider range of problems with the received wisdom. These include missing or misinterpreted revenue figures, revenue forecasts and collection costs; claims about alleged widespread public outcry, which boil down to a few, mainly unsourced, anecdotes; and an inexplicable willingness to accept that if a government believed or said something then it must have been true.

This is not to say that previous development taxes were in any way optimal taxation. Mistakes were unquestionably made in tax design and implementation, not least in the attempt to introduce taxes alongside other more politically controversial land policies. But detailed inspection of the circumstances suggests that each tax may have been repealed for different and often quite circumstantial reasons, rather than because of any shared inherent flaw which will doom any similar future attempt. Previous development taxes might prove to be a fruitful source of policy inspiration as the current government seeks to find more money for infrastructure.

Miles Gibson is a researcher at the Department of Land Economy, University of Cambridge. The author gratefully acknowledges the contribution of Professor Li Wan, also of the Department of Land Economy, to the research. The research is available here.

The CIOT publishes guest blogs to stimulate debate on tax policy and related matters. The views expressed in guest blogs are those of the writers and are not necessarily shared by CIOT.