Bell & Scott

In this month's issue we comment on the Government’s proposals for a Planning Gain Supplement, look at the BPF Leasing survey and the passing of the Housing Bill.

As widely predicted the Chancellor announced a consultation on a Planning Gain Supplement (PGS) in his pre Budget Report. For supplement read tax. The PGS has its origins in the Barker Report. The 2004 Barker report on Housing Supply in England recommended that the UK Government impose a PGS to allow the extraction of a proportion of the value gained through the granting of planning permission for housing development for use in the funding of essential infrastructure. The Government believe that this will alleviate the current housing shortage highlighted by the Barker Report.

The closing date for this consultation is 27 February 2006. The UK Government do not propose to introduce a PGS before 2008.

The first question that should be asked is what, if anything, has this to do with Scotland. Compared to the magnitude of the reaction to Barker in England the Scottish response has been almost non-existent. Indeed even the First Minister appeared to dismiss the Barker Report when he said “in essence it is about the English housing market”. However, the First Minister was quoted in March 2004. At that time it was difficult to find anyone in favour of introducing a PGS. Now we have the British Property Federation (BPF), the Confederation of British Industry (CBI) and the Royal Institution of Chartered Surveyors (RICS) all agreeing that something needs to be done to fund infrastructure improvements although they would prefer a local planning tariff rather than a PGS. That said, and perhaps understandably, none of these bodies seems to have looked at this from a Scottish perspective.

So does the Scottish Executive have a view on the matter? A recent report prepared for the Executive entitled “Planning Agreements and Positive Planning for Sustainable Communities in Scotland” acknowledges the funding gap and suggests that the funding gap should be met from outwith the planning system. The report also unhelpfully states that as taxation is a reserved matter it is beyond the scope of the report. Not only is this apathetic approach unhelpful, it is illogical as the Executive is responsible for both planning and housing which are inextricably linked with the raising of finance for the funding of infrastructure improvements.

The Executive is about to publish a Planning Bill of which it states: “The overall challenge for the Planning Bill is to set out a planning system that works for Scotland …”. The Scottish Executive also reviewed the Scottish housing market in July 2004. Given the obvious link between the funding of infrastructure improvements and housing and planning the Executive should consider the following:

whether Scotland has the same funding issues outlined in the Barker Report
if the answer to issue one is yes, whether a PGS is the right solution
if a PGS is the right option, does the rate set have to be the same level as in the rest of the UK
should it cover the whole of Scotland
should it be included in the review of powers to be further devolved to the Scottish Parliament

The proposed PGS is essentially a tax which the Government expects will be paid by developers (although in some circumstances it may be paid by another party such as the landowner). It is intended that it will be based on "planning gain". This is defined as the difference between the land value with full planning permission (known as planning value or PV) and the value of the land with its current use as permitted by the planning system (known as current use value or CUV). The PGS rate is then applied to the difference between the two values.

No rate for the PGS has yet been specified. The term "modest" is used throughout the consultation in relation to the rate to be applied. A figure of 20% has been mooted in the press. The rate will be set by the UK Government and there may be a lower rate for brownfield land. There is also nothing to suggest that different rates will be set throughout the UK.

The PGS will apply to residential and non-residential development, greenfield and brownfield land. Home improvements will be excluded and there may be a very low minimum threshold. The consultation indicates a reluctance to provide further exemptions due to the need to maintain a low rate of tax and to prevent avoidance.

Section 75 agreements are to be "scaled back" but will remain. The consultation is likely to produce a list of matters that can still be the subject of a section 75 agreement.

The first step is the making of the planning application. The second step is the granting of full planning consent and it is at this stage that the planning gain is created.

The developer then has to declare its intention to commence development. This could be a number of years after full planning consent is granted. This is to be done by the submission of a Development Start Notice (DSN). The DSN is to be submitted to either the appropriate local authority or Her Majesty’s Revenue and Customs (HMRC). Development cannot start until the DSN has been validated.

The DSN must identify the chargeable person i.e. the person or entity that is responsible for paying the tax. It may also be possible to register a DNS.

The consultation asks at what point payment of the tax should occur. The options given are at the commencement of development or at some other point in the development process. The argument put forward in the consultation for payment when development commences is that by that point the developer has secured sufficient interest in the land and financing for construction. This is likely to mean that a developer will be paying tax before receiving any income form the property.

Requiring payment when development commences is also likely to ensure that the developer is the chargeable person.

The chargeable person will be required to make a PGS return to HMRC within an as yet unspecified period of time. The PGS return will include valuations for PV and CUV, relevant supporting information and payment. Payment by installment may be allowed.

Part of the PGS funds collected will go to central Government and part will be redistributed to each local authority. This will almost certainly be one of the most contentious of the consultation issues. A Government spokesman has stated that the “overwhelming majority of income would be recycled within the region from which it derived”. However, the Office of the Deputy Prime Minister has only been able to confirm that the figure redistributed locally would be more than 50%.

The PGS regime will be enforced by a combination of interest charges, penalties and other compliance measures. Where there is sustained non-compliance a "Development Stop Notice" will be issued. This notice could be used where a DSN has been submitted and development has commenced but no subsequent PGS return was made or when development commenced without submission and validation of a Development Start Notice.

The consultation also refers to possible transitional arrangements. "The introduction of a tax would need to be accompanied by transitional measures to ameliorate the impact on developers already engaged in land sales contracts that were drawn up before this charge was introduced, or for those who hold large amounts of land already purchased, but where planning permission has yet to be secured.”

The response to the consultation has been mixed. The BPF, the RICS and the CBI continue to argue for a planning tariff. Liz Pierce, Chief Executive of the BPF said “This seems to be a consultation about the design not about the principles behind it or the alternatives to it.”

The success or failure of the PGS is likely to depend on the rate of tax, its complexity and associated costs, how much is redistributed to each local authority and how brownfield sites are dealt with.

The main arguments still being put forward against the introduction of the PGS are:

more taxes mean less development not more
this is an issue for the South East of England and should not be imposed on Scotland
development taxes have been tried before and failed

It is clear from the consultation that the Government has taken on board a number of the concerns raised since PGS was first mooted by Barker. That said whether the PGS achieves its goal of funding infrastructure improvements by taxing the planning gain is likely to depend on the PGS rate and how much of an administrative burden it becomes. Our faith in the UK Government introducing a new tax efficiently and effectively whilst taking the Scottish position into consideration has been seriously undermined by the continuing shambles that is stamp duty land tax. To prevent a similar state of affairs with a PGS the Scottish Executive must play an active role in deciding what is best for Scotland with regard to the funding of infrastructure improvements.

Lease Lengths Dropping

British Property Federation Annual Leasing Survey

The British Property Federation published its 8th Annual Lease Review this month. The review was based on 9,500 new leases granted in 2004/5 throughout the UK.

The main findings were as follows:

The average lease length (including break clauses) fell to 6.4 years from 6.8 years last year. The figure for 2004/5 would have been even lower but for one particularly large sale and lease back deal involving a department store group which distorted the figures.

Shorter leases are now increasingly common. Nearly two thirds of new leases granted in review period were 5 years or under.

Just 6% of new leases granted in the review period were for a period greater than 15 years.

Over the past decade average lease lengths have shortened in all Sectors.

The largest fall is in the industrial sector which fell from 13.5 years in 1995 to 6.8 years in 2004/5.
Office leases had the next largest fall dropping from 13.3 years to 7.1 years.
Leases in the Retail sector fell from 17.1 to 11.2 years over the same period.

The Chief executive of the BPF puts the reduction in lease length down to a “response to modern business requirements” and says that the most important finding is the “breadth of choice and flexibility being offered by UK business space providers which is unrivalled in Europe”.

The Report is available from the British Property Federation here.

The Housing (Scotland) Bill was passed on 24 th November. It contains a number of measures aimed at providing house hunters and private Sector buyers with better information and new rights.

The documents to be contained in the Purchaser’s information Pack are to be specified in Regulations to be issued by the Scottish Ministers. However the Executive has confirmed that the Purchaser’s Information Pack which is to be provided by the Seller or the Seller’s agent will contain “a comprehensive survey of house condition”.

Communities Minister, Malcolm Chisholm said: “So the single survey, commissioned by sellers at the start of the marketing process, will provide in depth, quality information to buyers about the condition of the house. Having a detailed survey at the outset, giving buyers an accurate valuation to offer an appropriate price, will reduce the problem of multiple surveys, which can costs buyers hundreds of pounds and leave them with nothing. It will also help stop sellers setting artificially low asking prices which gives buyers false hope. This will greatly simplify the buying and selling process for everyone.”

On the other hand, following the failure of the single survey pilot (which was scrapped after only 74 of a planned 1,200 surveys were completed), there are a number of critics of the new scheme. They fear amongst other things, that the Bill will have a detrimental effect on the housing market as it could result in properties selling for less money and fewer sellers putting their properties up for sale. Other potential problems include the increase in costs to sellers and the potential conflict of interests involved in a surveyor providing a survey for the use of both the buyer and seller.

The Explanatory Notes to the Bill are available from the Scottish Parliament website here.