The case against capital values is that they are a derivative value, being the capitalisation of the rental income stream, plus a bit added on to take account of expectations of future growth. The "bit added on" is the trouble. Not only is it is a bubble value, but the size of that bubble depends on where the land market is within the economic cycle. Approaching the top of the cycle, land titles are traded with expectations of future increases in the land price, using borrowed money. The bubble component is large. That is not all. The bubble also includes other expectations such as the possibility of planning consent.
With rental values, matters are clear cut. The annual value of a site with expectations of plannning consent is still only the current optimum use value. A piece of farmland is still assessed as such until consent has actually been granted for some other use. Expectations do not come into consideration.
Tax will be payable at the previous full rate if someone purchases a site with a house on it and demolishes the house. Once the consent has been granted for some more intensive use, then the assessment is based on that use. This gets rid of the argument often used against LVT, that the optimum use is uncertain. Where rental values are used for LVT assessments, then the valuation is based on the actual permitted use, permission meaning full planning consent. In most cases this will be existing use unless a site has been abandoned, in which case it would in most circumstances be the previous permitted or established use.
A major problem with capital value assessment is that these values are volatile and could change quickly even during the 12 months or so it would take for the valuation process. Had this begun at the top of the market, for example last year, the valuation list would have been full of inconsistencies. Rentals, on the other hand, have shifted hardly at all in the same period.
Of the proposed UK legislation, the 1931 Finance Bill was to have been levied on capital values but the 1939 London County Council Bill was on annual rental values.
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