housebuilders tax loophole

[james armstrong]

A CAPITAL GAINS tax effectively applied, could  increase the supply of land for new houses 
Land is an asset. Capital gains accruing on the increase in value of an asset are liable to tax when it is sold. (One  exception is if the capital represented in  the value of an owner's  main residence.)
Builders can avoid capital gains on landbanks. By increasing their landbank  they  can reduce tax liability by using  'Rollover relief' which  is available if the monies from the sale of an asset are used to replace that asset.
The replacement need not be 'generic' eg the sale of a house can be replaced by the purchase of land.
If I were a giant national housebuilding corporation selling 15,000 new houses per annum I would seek to avoid paying capital  gains tax running to many £millions  annually  by using  proceeds of house sales to  acquire potential building land.                                               
WHERE IS THE  LAND FOR NEW HOUSES ? 
   
BASED ON  BARRAT WILSON BOWDEN (BWB) INFO. FROM THEIR BALANCE SHEET - 
And USING THE BWB RATIO OF  PERMISSIONED LAND : STRATEGIC LAND (for guidance) SEVEN GIANT HOUSEBUILDERS HOLD  PERMISSIONED LAND FOR 224,383 NEW HOUSES  AND  CONTROL STRATEGIC LAND (with only potential for permission) FOR  400,324 NEW HOUSES based on RTPI  compare the  2005/6 UK national housebuild of 214,000 new houses.

When land without planning permission (strategic land) is purchased and gains planning permission  the owner receives a windfall gain, realised when the house or the land is sold.
When the land is further developed and  a house is built on the land and sold, the capital gain can be avoided by re-investing the gain in an alternative asset.   Buying further  strategic land 
qualifies for this roll-over tax exemption.
There is scope for the builder/landowner  to  design the land portfolio  by adjusting the  number of houses built, the relative quantities of strategic land held and the amount of strategic land which is processed into 'core' land with planning permission.   Adjusting this  affects the value of the land appearing in the balance sheet of the corporation which in turn affects the share value.
The figures involved are quite large- £1.6billion for Berkeley alone (RTPI )

This adjustment could affect the builder's motives for building houses using land in the current year, with the effect of reducing the output with a view considerations of  share price, capital gains liability as well as demand. (also what BarkerIR87 calls "absorption rate' i.e.regulating local supply so as  not to jeopardise local  prices)  
Another effect is reducing the competitive pressure from alternative local suppliers of houses-   deterred by the potential local land being held by the principal housebuilder.  This market power in turn allows setting local house prices higher  than would be the case if competitive pressure existed. Using market power to set prices high is potentially if not actually unlawful. 
 Barker IR p 81 hints at the effect of capital gains tax on housebuilding  …
"capital constraints within firms may mean housebuilders wish to phase developments" 

The present 'roll over' relief from  capital gains encourages the amassing of landbanks and so  further  reduces the scarce land with planning permission available for building houses.
A tax break costing the Inland Revenue some £billions annually gives builders an incentive to restrict the supply of new houses.   A land tax yielding land would reduce and could  remove this restriction on housing supply.                 James Sept 08


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