Estates Gazette • 15 February 2025 • View from the bar

The government’s proposals to fund public projects through taxing development land run the risk of repeating past mistakes

How will the government achieve its stated aim of delivering 1.5m new homes by the end of this parliament? This is said to depend, among other things, on improvements in the planning system, the relaxation of red tape and the freeing up of some green belt land. But a centrepiece of these reforms is a possible revision of the manner and extent to which development gains can be taxed by the government and redeployed to fund infrastructure projects and other public “goods”.

Development land tax regimes, under which governments have over the years tried to devise charging mechanisms whereby developers fund public infrastructure or affordable housing, have a chequered history.

An early example of development charge was introduced by the Town and Country Planning Act 1947, but proved unworkable and unpopular, leading to the repeal in 1952 of the financial provisions relating to the charge. The same fate awaited a similar charge introduced by the Land Commission Act 1967.

A third attempt was introduced by the Labour government in the Development Land Tax Act 1976. This levied a tax of 80% on capital gains realised on the disposal, or deemed disposal on relevant development, of the land in question. That went hand-in-glove with the Community Land Act 1975, which imposed on authorities duties to acquire land for development, a step towards the nationalisation of land.

The above is a warning from history. Ideological objections aside, all three attempts at capturing uplifts in value attributable to planning permission or development have failed. The complexity of the legislation, and its administration, was one reason for that. The uncertainty as to what triggered a charge, and in relation to the valuation process to set the level of the charge, was a second reason. The unintended consequence, that development was disincentivised, resulting in land hoarding (or the carrying out of schemes which did not trigger the charge), was another.

Presently, there are several mechanisms on the statute book directed at the same policy, but which seek to avoid the complexities that led to the failure of each of the successive schemes above.

Section 106 agreements (under the Town and Country Planning Act 1990) can be individually negotiated to obtain bespoke obligations to fund projects relevant to the development. This has been supplemented by the community infrastructure levy which, if it has been implemented by the relevant local authority, involves payment by developers of a tariff contained in a published schedule towards local infrastructure projects generally, whether or not related to the development.

Also on the statute books is the infrastructure levy, introduced by the Levelling-up and Regeneration Act 2023. That scheme will now be implemented, but was intended further to reduce the need for individually negotiated section 106 agreements and to replace CIL (but not the mayoral CIL in London). The IL would have allowed funding for all matters that can now be funded by CIL, but extended also to affordable housing, emergency services facilities and equipment, and climate change mitigation. The IL would have been linked to gross development values of the land in question and would therefore have operated as a form of development value capture.

On 22 January 2025, the Housing, Communities and Local Government Committee, a cross-party Commons select committee, announced a consultation entitled Delivering 1.5 million new homes: Land Value Capture. The call for evidence, closing on 5 March, seeks evidence about the efficacy of existing mechanisms of land value capture, including CIL and section 106, but also the compulsory purchase regime.

The more radical proposal is the introduction of another new form of development land value capture. The chair of the Committee identified additional “public goods”, such GP surgeries and schools, that might be funded in this way.

What form of land value capture does the government have in mind? The Financial Times reported on 8 July 2024 that the proposal under active discussion within government is that the uplift should be recouped by way of a “discount” from the landowner on land sales.

A few observations from us, which show the complexity of the job in hand. First, should the triggering event be a disposal of the land; or should other transactions, such as the sale of shares in the land-holding company also qualify? Second, should the trigger also be a deemed disposal on the occurrence of, for instance, the obtaining of planning permission (as is the case in some overage provisions)? Or does the imposition of a tax liability for a (for the time being) paper gain cause too much injustice? And third, how is the “discount” to be calculated? Must the “real-world” purchase price, reflecting the reality that some proportion of the development value will be captured on sale and therefore presumably excluding that element of value from the price, be deducted from a hypothetical value on the assumption that no capture will take place? If so, is there is a risk that any new regime will collapse under the weight of its complexities, as the three previous iterations did? And fourth, if the development gain is captured at the point of sale, does that mean that the additional imposition of obligations on developers to deliver, say, social housing will no longer be appropriate, representing a form of “double recovery” for the state?

There is a reason why the law has fallen back on the (relative) simplicity of CIL after experimenting with development land tax. The country obviously faces a deep housing crisis. Should we learn from history, or promote a tax regime that has, in various forms, been tried and failed, and places developers and landowners in confrontation with the state, rather than in a co-operative relationship?