Guest blogger, Mark Stephens from The Urban Institute at Heriot-Watt University, looks at historic experience of land value capture and identifies what lessons current policy makers could take from this experience.

All advanced economies face challenges of paying for social infrastructure including affordable housing and schools, as well as the challenge of paying for major transport infrastructure. In a world where corporate tax bases and high net worth individuals are mobile, policy makers are logically turning to the land – or more specifically “land value capture”.

The possibility of the state taxing (or in some other way capturing) the uplift in the value of land arising from the conferment of planning permission is possible because land use rights were nationalised in 1947. This meant that the state was no longer obliged to compensate landowners who were refused planning permission. It also meant that the entire uplift in the value of the land arising from planning permission could belong to the state.

That is what the 1945-51 Labour Government thought when it introduced a 100% development charge. The tax itself was not a great success, bedevilled as it was by its complexity and over-comprehensiveness but the lack of capacity and technical ability to make reliable valuations, and a “sellers’ strike”. It was abolished by the in-coming Conservative Government.

This episode set the pattern for the coming decades. Labour would introduce some form of development land tax and the Conservatives would repeal it when they returned to power. An important lesson from this policy turmoil is the need to establish a political consensus to underpin the credibility of any land value capture scheme. It, and later schemes, also suggested that the system will be overwhelmed if the threshold for liability is set too low, and that sufficient administrative and technical capacity is required.

The current system of developer contributions/obligations grew up from the 1980s and is now given a statutory basis as s75 agreements in Scotland and s106 agreements in England. These agreements are negotiated on a site by site basis between the developer and the local authority. The uplift in the value of land arising from planning permission provides the scope for negotiating developer contributions to pay for off-site infrastructure costs arising from the site. Since 1991 in England and 1997 in Scotland they have also been used to fund social or other forms of affordable housing. Whilst it is difficult to argue that affordable housing is a need that arises from a development, it has become an accepted de facto tax on development.

Recently the effectiveness of the schemes has been questioned. There is unequal power between developers and planning authorities in terms of the expertise of negotiating obligations, and cracks in the underlying theory were exposed by the collapse in house prices following the credit crunch. The system has been subsequently undermined in England by “viability” tests that effectively pass development risks on to the state, and may lead to developers over-bidding for land.

Attempts at land value capture have been extended to other developments in England through the Community Infrastructure Levy (CIL), under which local authorities make standard charges for different types of development. The purpose of CIL, provision for which is included in the current Scottish Planning Bill, is to pay for general infrastructure needs in an area. Whilst CIL is bedding down in England, it has some obvious drawbacks. These include the use of standard rates: if these are not to deter development on lower value sites must be set in a way that undertaxes high values ones.

These mechanisms leave much of the uplift in land value arising from planning permission uncaptured leading some commentators to argue that the law that ensures that land purchased compulsorily by the state must be at full market (rather than existing use) value should be changed. Others suggest that to do so would contravene the European Convention on Human Rights. Yet our study identified a model for land value capture employed in the Netherlands, which relies on local authorities purchasing land somewhat above existing use value but below full market value. We also identified market-like mechanisms for capturing land value as being effective in the Netherlands and China – in the latter case where land use rights are auctioned and this provides the main source of revenue for local government. Clearly the ECHR issue requires urgent clarification.

Even if the UK were able to develop a more effective use of land value capture at the point of sale or the granting of planning permission, it would have two clear limitations.

One is that the current focus on capturing land value at the point that planning permission is granted means that subsequent increases in land value that arise from the actions of other public and private actors remains uncaptured. An obvious example would be the introduction of a transport infrastructure project, such as a light rail system, which leads to residential and business land values increasing along the route. This points to an imperative to consider other forms of land value capture in parallel with developer contributions, such as perhaps land value taxation.

A second is that land values vary greatly geographically meaning that there may be little or no land value to capture in some areas. This implies a need to ensure redistribution takes place between different areas.

An assessment of historic attempts to capture land value uplift in the UK by Colin Jones, James Morgan and Mark Stephens is published by the Scottish Land Commission.