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Frequently Asked Questions about Land Value Taxation

In this section of the web site we have a series of FAQs to help people further their understanding about the application and benefits of Land Value Tax.

If you have any questions at all why not contact us at the LVTC and ask - we can add the answers to this section.


How is land valued?

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This article on the principles of valuation by Christopher Glover is commended as an introductory guide and is reproduced by kind permission of the author. It is published on this website in order to promote discussion on the subject, and although it is broadly in line with the Campaign's own views, does not necessarily reflect its views in detail.

1. In order to tax land values, the value of the land has first to be assessed. In any system of LVT the way in which land values are assessed will be of critical importance to taxpayer and Government alike. From the taxpayer’s point of view, the method of valuation should be logical, transparently clear and fair. From the Government’s point of view, the tax base should be stable and the revenue from it predictable.

Capital or rental values?

2. The value of land can be expressed in two ways – what it would fetch if sold, i.e., its capital (i.e., market) value, and what it would rent for, i.e., its annual rental value. For the reasons explained in this paper, it is important that LVT be levied on the annual rental value and not on the capital or market value.

3. At first sight, this seems odd, even perverse. Apart from farmland, bare land is rarely, if ever, rented. There is little or no evidence of land rents. On the other hand, building land is constantly being bought and sold and it is not difficult to find good objective evidence for capital values. The problem with capital values, however, is that they are subject to the vagaries and vicissitudes of market sentiment and can fluctuate considerably. The yield of LVT based on capital values is likely to vary considerably. This lack of stability and predictability in the yield makes the capital value basis unsatisfactory from the Government’s point of view. It is also unsatisfactory from the taxpayer’s point of view, as the tax he has to pay may well fluctuate from year to year.

4. If rents are fairly stable and land prices reflect rental values, why should land prices be unstable? One obvious reason is interest rates. Land prices are very sensitive to interest rate movements given that most land transactions are financed by borrowing. It is not just actual interest rate movements which are relevant here, but the expectation of interest rate changes. Land prices are also subject to speculative surges. When these over-reach themselves, land prices can fall dramatically. It would be inappropriate to import this frothy overlay into the LVT valuation base. It would be a serious error, therefore, to base LVT on capital values. Annual rental values alone can meet the necessary requirements for stability and fairness.

Assessing the annual rental value of land

5. If bare land (other than farmland) is hardly, if ever, rented, how can land rental values be assessed with confidence? If annual rental values cannot be assessed with confidence, how can they meet the criteria of fairness and transparency?

6. Although land is hardly ever rented on its own, it is constantly rented with a building on it. The rent of a property, i.e., land and building, therefore has two components – the rent of the land and the rent of the building. In this country there is an efficient market in the rental of all categories of land and buildings, i.e., commercial, retail, industrial and residential. The annual rent for all these types of property can be assessed with confidence. The question then is: does there exist a sound technique for assessing how much of the rent is attributable to the building and how much is attributable to the land? It is argued here that there exists a proven and acceptable technique for doing just this.

7. By way of illustration, take the case of a newly built three-bedroomed house with garden in a suburban South Eastern location. Its sale value is £300,000. The house cost £150,000 to build including the builder’s normal development profit. It follows that the balance of £150,000 – half of the total - must be attributable to the site. If the rent is £1,000 a month, i.e., £12,000 per annum, it is fair and reasonable to impute half of this to the land. The annual rent for LVT purposes would therefore be £6,000, i.e., half of £12,000.

8. The relationship of land to buildings – 50:50 in the above example – will vary across the country and even within a particular locality. I the North, for example, the land element in property values will tend to be lower. In very depressed areas it could even be close to zero. By the same token, in particular areas of the South East, e.g., Central London, land values may well account for considerably more than 50% of property value, perhaps even as much as 80% or more.

9. Most properties are not new and many in fact are very old. As any home owner knows to his cost,
a building deteriorates with time and requires increasing maintenance. This should be taken into account on a depreciated replacement cost basis in allocating the property value between land and buildings. Admittedly, working out the depreciated replacement cost of a property requires skill and experience but this task is well within the competence of surveyors and valuers. Done as a matter of routine in an LVT environment, the technique would be refined and standardised across the country, thus ensuring consistency and fairness.

10. The land rent thus assessed would properly be described as an imputed or attributed rent. This technique of imputing a land rent from the property rent would account for the vast majority of land value assessments whether it concerned industrial, commercial, retail or residential land. There would nevertheless be instances where this technique would not be applicable or where it would require modification. Obvious areas where special arrangements will be needed include parkland and open spaces, churches, schools and hospitals. It would be out of place in a paper of this general nature to detail these special arrangements.

Property (i.e., land and building) rents

11. In view of the above, the way in which property (i.e., land and buildings) rents are assessed is clearly of prime importance. What is sought is the open market rent, i.e., the annual amount it is reasonable to suppose that the property in question would rent for if advertised in the normal way. This is a task which is carried out all the time by chartered surveyors and estate agents across the country. The process takes into account the age and condition of the property, its location and suitability for its purpose. The annual rental is then assessed by reference to the rental being paid on comparable properties, taking into account differences between the subject property and the comparable properties.

12. In coming to his assessment of the annual rent, the valuer would naturally have to take into account all relevant factors, i.e., factors which affect the rent. This would be a matter of professional judgement on the part of the valuer. It would be a mistake to hem the valuer in by specifying relevant or non-relevant factors. There would be one exception to this rule. In assessing the market rent for the property, it should be assumed that the tenant has the right to renew the lease (at the then market rent) indefinitely.

13. It would be vital for the credibility – and, hence, acceptability – of any LVT scheme for there to be regular periodic valuations. Valuations under the old rating system were done every five years. As LVT would be a far more significant impost than local rates, valuations would have to be updated at least every three years. The aim should be to achieve even greater frequency.

14. Land rental value assessments would be subject to appeal by the taxpayer. In the case of an appeal the valuer would have to justify his rental assessment and show the evidence of market rents on which he has based himself. Annual rents that cannot be justified by reference to market evidence cannot stand.

15. As with any new tax there are bound to be circumstances not envisaged by the initial legislation. This will no doubt be the case with LVT. However, as regards valuation, the generation schema set out in this paper should provide a feasible framework.

There is more information on valuation in these reports by the professional valuer who conducted land value surveys in 1964 and 1973.
Whitstable 1964
Whitstable 1973
 

Is LVT a wealth tax?

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Wealth taxes are a very bad idea, and this example shows why. There is an old woman I know who lives on a small state pension and disability benefits, in sheltered accommodation. But her great grandfather was a well known Victorian painter and she inherited a couple of pictures. They need expensive conservation which she cannot afford.

But under wealth tax someone would have to check to see what pictures people had on their walls and in their attics, value them and clobber their owners. My friend could I suppose try to charge people who wanted to come and look at them, but in principle, the ownership of wealth as such does not necessarily provide the means with which to pay a tax on it.

This is the trouble with levying a tax on a value that cannot be realised except by sale of the item or items. Precisely the same objections apply to LVT levied on capital values. And a further disadvantage is that people get the idea that LVT is a wealth tax, which it is not. LVT must be based on annual rental values and it must be made clear that this is a revenue stream or imputed revenue stream exactly like earned income, with the difference that it is not earned by the owner but created by the public at large.

Henry Law
   

How does LVT apply to mortgaged land?

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How land value tax should be applied to land subject to a mortaged was discussed in a talk given by Gavin Putland to the International Union for Land Value Taxation at its conference in April 2010. The text can be downloaded here
 

What are the essential features of a sound LVT?

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The tax is payable on all land, with no concessions, allowances or thresholds. Allowances have the effect of reducing the amount of existing taxes that can be abolished. Thresholds could, in addition, lead to avoidance by sub-division of land plots.

The rate of tax is set nationally and at the same rate for all classes of land
. Local authorities should not be free to set their own rate of LVT. There is too much variation on land values from one area to another, for example, between Ashford and Ashington. Local authorities should, however, be entitled to a proportion of the land value tax raised within their areas, to give them some incentive to carry out projects that enhance land values. How this can be done equitably needs futher consideration. The bulk of local authority revenue, other than that raised from direct charges on services, should come from the national LVT revenue pool, probably on a capitation payment basis.

Assessments should be on annual values.
Superficially, capital value assessment is an easy option but it is full of pitfalls. It goes against the entire principle of LVT which is the collection of the rental value of land as public revenue. The selling price of land titles is only loosely related to the value that LVT is actually trying to collect. Built into this price are factors such as present interest rates and expectations extending far into the future, including changes in interest rates, the general economy, and possibilities of development consents. To levy a charge based on the selling price of land is to attempt to tax a value which cannot be realised without liquidating the asset. Not only is it fundamentally unjust; it also gives rise to practical difficulties of valuation as it is necessary to make assumptions about future planning policy. To propose capital value assessment is to solicit unneccessary opposition. It is not a logical precursor to annual value assessment.

All land is subject to the tax
This includes land in agricultural use and non-market uses such as affordable housing. Land should always be valued at its true value and the tax should be payable. Where land is occupied by social housing, then the local authority or housing association should be liable for the tax. In principle, this tax should be paid, even though some or all of the amount is subsequently reclaimed as a rebate, or an equivalent arrangement made in the way that was most efficient from an administrative point of view. The important point is that any subsidy should be identifiable and open to audit.

Valuation must be frequent
The maximum time between full valuations should be five years. Rolling revaluations based mostly on statistical date should take place annually.
 

How can I avoid LVT?

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I work away from home all the time and basically live out of a hotel all week. I only use my house at the weekend (which is for sale anyway). When I sell, I'm considering staying in hotels permanently.

So under LVT would I effectively be paying no tax?

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Why are we against Capital Gains Tax?

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It has been suggested that the house price (land price) bubble could have been prevented by a Capital Gains Tax. There is also a feeling that capital gains, on, for instance, share transactions, should be taxed as they are an unearned profit. So shouldn't we be supporting them?
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Football star's injury proves "rent of talent" = wages

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“Rent of Talent”, a notion that grew up some time around the 1900s, has cast a fog of confusion over the term “Rent”. The talents in question were those of opera singers, sportsmen, and the like. The argument went that if land rent should be taxed, so should natural talent, thereby opening up the case for progressive income taxes. This helped the landowning interest, as it diverted attention away from their own privilege. But “rent” is the wrong term for the these high earnings.
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LVT - national or local?

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We want your views

A difficulty with any form of local taxation is that resources and needs do not match. Consider, on the one hand, the London boroughs of Westminster, and on the other, boroughs such as Haringey, Lewisham and Newham, just outside the central area. In Westminster are to be found Parliament, major centres of shopping and employment, and some of the most sought-after residential areas of the capital. The latter boroughs include some of the poorest people in the land. In Westminster, there are many possible taxes that would easily raise sufficient revenue to pay for public services, and probably at quite a low rate. In Haringey, Lewisham and Newham, there is no possible tax that could produce the revenue. This problem is usually described as a mismatch of needs and resources. It has usually been solved by some kind of equalisation scheme in which funds are collected centrally and redistributed according to need, using some formula or other.

Land value taxation would suffer from precisely the same problem if used as a local tax,
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How might LVT be implemented?

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Partly as a result of the discussions that have been taking place under the sponsorship of the Coalition for Economic Justice, of which the Campaign is a member, we have had further thoughts on how LVT might be introduced. The concern that has been expressed centres around the role of local taxation. Put simply, there is a lot of land value in some local authority areas and very little in others, and this is unrelated to the costs of providing the services. The highest rates of LVT would have to be levied in the poorest areas. It has long been recognised that there would be a need for an equalisation scheme to redistribute the revenue, a problem that applies to any tax; the same would be true, for example, of local income tax or local sales tax.

We put forward here for discussion a radical solution: capitation payments which the authorities would be free to spend as they wished - a kind of reverse poll tax. What are the objections? Is it undemocratic? Is it unjust? Please give us your views. Read our proposals here
 

Would LVT disrupt financial services?

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Yes. It would transform them. It is not the least of the beneficial effects of LVT.
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