What role for Land Value Tax?
Hamish Trench
With over half of the UK’s wealth tied up in land and property, the way we tax land affects not only who owns it but how that wealth benefits the broader economy.
As public finances strain under increased pressures, there are calls to revisit how we tax land, including whether land value taxation (LVT) could replace council tax as a more effective, fair, and productive approach.
Land value taxation has long been proposed as an effective way to tax. It is seen as fair because the value of land is significantly socially created by public investments, policy and regulation. It is seen as economically effective because it doesn’t disincentivise productive activity and has the advantage of being hard to avoid.
However, while the theory for LVT is compelling, introducing it in practice has proved more challenging. Our research found it has been tried in 33 countries, often in conjunction with other property taxes, and this experience offers useful learning. Internationally, successful LVT systems rely on sustained public support and political consensus. When these elements are missing, efforts to introduce LVT often don’t last long.
Introducing a single land value tax to replace several existing taxes, however strong the theory, is unlikely to be practical in one step and the basic building blocks are not currently in place to make it workable. There is though, a strong case to reform annual land and property tax and change existing taxes to better tax land value.
The case for council tax reform is well articulated, with current charges only loosely tied to property values and set within a framework that has remained largely unchanged since 1991. Several approaches to reform have been put forward and these need not wait for wider land value tax reforms. A broader approach to reforming annual land and property taxation would involve non-domestic rates. Reforms here could introduce a split of value between the underlying land value and the value of the build property. Moving in this direction could allow tax to better reflect where value really lies, without disincentivising improvements to property.
A reformed system of annual land and property tax would also open up the opportunity to replace Land and Buildings Transaction Tax, a reform recommended by several UK government reviews given it is seen to be a disincentive to moving house, constraining productive economic activity.
Making reforms to better tax land value requires groundwork. Foundation steps include completing a comprehensive land register and developing a “cadastral” system to bring together data on land ownership, use, and value. A phased programme to bring all land on to the valuation roll would open up the future options that government has to reform and improve annual taxation of land and property.
At the Scottish Land Commission, we are currently refreshing our advice to Ministers on land and tax policy, ahead of the Scottish Government’s tax strategy. Our advice emphasises the value in a route map for phased reform that sets a clear direction of travel and a step-by-step approach. Around that we could then build the collective engagement, understanding, clarity and consensus that any successful and lasting land tax reforms will require.
