housebuilders tax loophole
james36armstrong at hotmail.com
Thu Sep 27 14:43:44 BST 2007
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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