Valuations
There are of course lots of ways in which valuations can be carried out, all with their advantages and disadvantages. We have mentioned many of these below. None is perfect, but taxes are all to some extent arbitrary and have their hard edges. The basic principle of funding government out of charges on the resulting rental values is far more important than the precise details.
Business Rates valuations are already based on rental values. These would be adjusted by adding the current Business Rates bill to current rents and deducting the rental value of the physical building (for example, £10/square foot for standard office space, £5/square foot for industrial units and warehouses). The tax rate would simply be required receipts (£35 billion to replace Business Rates, SDLT paid on commercial lets and sales and taxes on capital gains) divided by the adjusted total rental value of all commercial premises in the country.
The simplest way of doing valuations for existing housing this would be to adapt the existing Council Tax system.
Step one – we assume that current use is maximum permitted use. All homes in the UK are put into Band A to H by type of home. So studio flats go into Band A (with an automatic single person’s discount; one-bed flats into Band A (without single person’s discount); two-bed flats and terraced houses into Band C; typical three-bed semi-detached houses into Band D; and so on up to the largest detached homes, which go into Band H (with perhaps a Band I for unusual or unusually extravagant homes). In borderline cases, a home can be put into a hybrid Band, for example, a slightly larger than average semi-detached house would go into Band D/E
Step two – the country is divided into smaller valuation areas with a few thousand homes in each, such as a postcode sector or a local council ward. The average total rental value of homes in each Band in each area (regardless of improvements or state of repair) is established on the basis of actual market rents and the rents implied by what a first-time buyer with a small deposit has to pay in mortgage repayments. To discourage appeals, it makes sense to deliberately under-assess the total rental values and apply a slightly higher tax rate to the resulting lower figure. The assessed value in each Band is then smoothed to maintain the current Council Tax ratios, so the assessed total rental value of a Band A home is two-thirds as much as for a Band D home; the assessed total rental value of a Band H is twice as much as for a Band D home.
Step three – the site premium of homes in the cheapest ten per cent of areas is assumed to be nil in all Bands, and the LVT on such homes is a token £100 a year (so that they don’t drop off the radar). The total rental value of these exempt homes in each Band is subtracted from the assessed total rental values of all other homes in the same Band (wherever they are in the country) to arrive at the pure location value or ‘site premium’ of all other homes.
Step four – the assessed site premium of all housing in the country is added together. The required percentage LVT rate is simply required total receipts divided by that total assessed value, and the LVT on each home is then calculated as that national percentage multiplied by its site premium.
Developers would no longer have to pay planning fees or ‘roof taxes’. They would be liable to pay the LVT on whatever they are given planning for (with a one-year holiday to cover the construction period).
The Banding lists would be made public so that all owners can check that their home is in the right Band. After the initial appeal period is over, there is no need for a home ever to be moved up or down into a different Band. Future purchasers will be deemed to have accepted the Banding as correct when they buy, as they will have adjusted the purchase price down if they felt that it was in too high a Band (and so they have already banked a saving equal to the additional future LVT).
Valuations can be updated automatically and regularly to take into account recently agreed market rents and recent actual selling prices (assessed values can be based on three-year moving averages to smooth out recent changes and blips). Landlords would be required to notify the valuation agency of the rents they agree on the inception of each new tenancy (who would pass a copy of the notification to the tenant). Those who do not notify would not be able to sue the tenant for rent arrears (using the same logic as old Stamp Duty, which was self-reinforcing because unstamped contracts were not enforceable in Court). The data on rents and selling prices would also be made public (HM Land Registry has published selling prices by address and postcode since the early 2000s).
This valuation system is not perfect, no system is – we are not recommending it, we are merely putting this forward as a working basic model. But it would be very cheap to carry out, and easy to update and understand, being similar to the Council Tax banding system.
Farm and forestry land valuation is a very specialised area. The total rental value of all UK farm and forestry land is only 1% or 2% of the total value of urban and developed land, so it is barely worth taxing. The most important thing is that landowner subsidies are phased out (these are like a negative LVT). A flat rate LVT on farmland of £20 per acre per year would raise little revenue but have significant environmental benefits (marginal land would be set aside for rewilding, recreation purposes and as flood protection).