Physiocrat reminded me to dismantle the Scottish Land Commission - Investigation of Potential Land Value Tax Policy - Options for Scotland - Final Repor.
A lot of it is fairly positive, but they are in a muddle on valuations, making it seem far more difficult than it really is, probably deliberately or perhaps out of intellectual laziness.
From page 30:
Land needs to be valued. This should ideally be undertaken using the comparison approach i.e. by analysing market evidence of comparable land sales. However, evidence of undeveloped land may be scarce.
The alternative is to use an approach whereby evidence of the value of land and buildings sold or rented as an ‘entity’ is analysed to extract the value of the land.
This is not 'an alternative', this is how it's done. The site premium of the few plots of bare land in urban areas is inferred from this (assuming in same area with same planning).
Undertaking this can be problematic as the ‘residual’ method, whereby build costs and other adjustments are subtracted from the total value of the development to arrive at a ‘residual’ land value, can produce confounding results...
We should be using rental values, not selling prices, but for the initial valuations, it's good enough.
... For example, take two dwellings side-by-side. One is three-storey and developed to highest and best use (market value = £1m, build and other costs = £0.5m, so land value = £0.5m), the other is two-storey (market value = £0.7m, build and other costs = £0.3m, so land value = £0.4m).
The land value (and therefore the LVT) of the first property is higher. The relationship between property value and build cost is penalising the development of land to highest and best use, which is counterintuitive as far as a land value tax is concerned.
Initial valuations can be based on actual use, as this is a good proxy for 'optimum permitted use'. At the time any building was built, it probably was the optimum permitted use.
That might change over time, but only gradually; if nobody's applied for change of use on his own plot, we can reasonably assume that the current owner considers this still to be the optimum. If somebody build a larger home ab initio; or bought a smaller home, knocked it down and built something bigger; or bought a smaller home and built an extra storey, that is clearly his opinion of optimum use.
Whose opinion is a better indicator? Nobody knows. Does it matter? No. Valuations are always going to be a bit arbitrary, what matter is consistency of approach.
1. We shouldn't ignore the past and what's already there, so we could just assess the smaller house plot at £400,000 and the larger house plot at £500,000 and have done with it.
Similarly, we shouldn't ignore demolition costs and hassle (as the report does) and practicalities. What is the optimum permitted use of the smaller home? It's probably "leave it as it is".
If you want a larger home on that street but none are for sale, you could buy a smaller one for £700,000, knock it down at a cost of £50,000; build a larger home for £500,000, you've ended up spending £1.25 million for a home worth £1 million, which ain't going to happen. So £400,000 is still a fair assessment.
2. Or maybe you can just buy a smaller home and spend £150,000 on an extra storey; half of the value uplift from £700,000 to £1 million. In which case, if it's a mixed street with equal numbers of easily extendable smaller and larger/already extended homes, it makes sense to assess them all at £450,000. If there are ninety smaller homes and only ten larger ones, assess them at the weighted average of £410,000.
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Whichever method is chosen, it will be good enough for initial assessments (I am heartily indifferent), and the % rate would simply be based on the total revenue required to replace existing taxes are replaced, so not huge £££ amounts. Over time, we can be a it more sophisticated; use rental values not selling prices, and so on.
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