Should we expect a land value tax in Scotland?
By Donald Drysdale for ICAS
20 August 2018
Land value tax is attracting much attention as a progressive and efficient form of property tax, and Donald Drysdale wonders whether we should fear or embrace its introduction in Scotland.
Scottish land reform
Back in September 2017, Scotland’s minority SNP administration published A Nation with Ambition, its programme for Scotland for 2017/18.
Among the many formidable plans which the Scottish Government set out in that paper was its intention to proceed with a range of land reform initiatives being driven forward by the new Scottish Land Commission. One of these was to review the potential for introducing some form of land value tax (LVT) in Scotland.
What is land value tax?
LVT is a tool for raising public revenue through an annual charge based on the rental value of land. In its purest form, it is based on the unimproved value of that land, ignoring any buildings, services or infrastructure on the land.
For example, if a site with an unimproved value of £200,000 would command a notional annual rent of (say) 5%, or £10,000, then LVT would be payable by the owner or occupier at a specified percentage on this rental value. If the rate of LVT was set at (say) 20%, this would result in a tax charge of £10,000 × 20% or £2,000.
Political decisions would be involved in setting LVT rates at either national or local level. For instance, a single rate of LVT might apply to all business land across Scotland, or perhaps separate rates for agricultural and other business land. Meanwhile, each local authority might have discretion (perhaps within specified limits) to set an LVT rate for domestic land within its jurisdiction.
Such a tax would create an incentive to develop land to its fullest potential use because the same charge would be levied irrespective of whether the site was abandoned or put to productive use. Owners or occupiers and potential developers of derelict land would be particularly affected. A tax based solely on site values would not discourage the improvement of properties.
Scottish Land Commission
LVT has been an element of the land reform debate in Scotland for several years and the Scottish Government asked the Scottish Land Commission to look at its potential. In December 2017 the Commission invited tenders to investigate international experience in LVT to identify policy options for Scotland.
This initial work, the results of which are not yet published, is intended to look at how LVT has been used to realise relevant policy objectives elsewhere and pinpoint what practical issues would need to be addressed in considering its use in Scotland. The Land Commission’s stated aims are to identify policy options for using LVT to contribute to a more productive, accountable and diverse pattern of land ownership and use.
LVT is not a new concept
Forms of LVT already exist in Australia, Denmark, Estonia, Hong Kong and the USA. There is no standard pattern, and features of these taxes vary considerably.
In the UK, the final report in 2011 of the Mirrlees Review, Tax by Design, combined a strong case for taxing land values with a strong argument against taxing business property. It concluded that LVT on the unimproved value of business land should replace non-domestic rates.
Mirrlees suggested replacing council tax with an LVT that more closely reflected actual land or property values – levied not within bands but as a proportion of up-to-date values with no cap and no discount for unoccupied or single-occupancy properties. To simplify administration the LVT might be based on improved market values of residential properties, but using unimproved values was seen as preferable if it was feasible.
Another radical proposal by Mirrlees was to abolish stamp duty land tax (SDLT) and set the rate of LVT higher than it would otherwise have been, thus replacing an inefficient transaction-based tax with a more acceptable annual charge – with a phased introduction to address transitional issues.
Opportunities for reform
The Scottish Commission on Local Tax Reform considered alternatives to council tax and published its report Just Change: A New Approach to Local Taxation in December 2015.
For illustration, the Commission modelled two possible approaches – a reformed, proportionate council tax and a progressive tax based on capital values – but it saw a substantial political challenge in linking liabilities to up-to-date property values.
It also liked a third option – LVT based on unimproved site values – but concluded at the time that gaining a full understanding of its impact would require further analysis, and knowledge of land ownership and land values was not sufficiently complete to support an early implementation of LVT.
The Commission was particularly concerned about the regressive nature of council tax – with those in the most valuable homes, worth around fifteen times the lowest value homes, paying only three times the tax. It was also worried that council tax took little account of ability to pay, and suggested that local authority funding should be broadened to include a local income tax – while admitting that this would present many practical difficulties.
Any viable alternative to council tax is likely to create substantial losers among those with the most valuable homes, many of whom have above-average incomes. Perhaps of greater concern are pensioners in large homes who are asset-rich but cash-poor, and it is to be hoped that any proposals for reform would make allowance for their circumstances.
The Barclay Review reported in August 2017 on possible reforms of Scotland’s business rates system. It supported the recommendation of the Commission on Local Tax Reform that more work should be done to assess land values so that the debate over LVT could be better informed. (Note that the Scottish Government is currently consulting on implementation of the accepted recommendations of the Barclay Review.)
Neither of these reports picked up the idea of using the introduction of LVT as an opportunity to replace land and buildings transaction tax (LBTT), but this suggestion from Mirrlees might well be well worth exploring.
Anti-avoidance
LVT would be levied on the owner or occupier of land, regardless of their residence status, and collecting the tax from those overseas might present some difficulties – though probably in relatively rare instances.
The tax due would be based on the value of the land, which is a finite, immoveable resource. Scope for avoidance is naturally limited because land cannot be relocated or otherwise concealed, and therefore adverse behavioural consequences by taxpayers would be minimised.
Political support
In Scotland, the concept of LVT is finding favour not only within SNP circles. It is also supported by the Scottish Green party and by some within the Scottish Liberal Democrat and Scottish Labour parties. There is also a degree of support for LVT at a UK level.
LVT is not a hypothetical fiscal concept of limited academic interest. It may actually happen.
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