A Land Value Tax for Northern Ireland
This report was commissioned by NICVA's Centre for Economic Empowerment and produced by Ronan Lyons and Andy Wightman.
Northern Ireland has recently experienced perhaps the most severe property market crash in the developed world. The real estate bubble led to excessive mortgage debt, depressed consumer spending, distorted investment, and constrained economic growth. Speculation on the future value of land is a major cause of such bubbles.
Land Value Tax Explained
Real estate is comprised of two components: land and the improvements (typically buildings) on the land. It is primarily the owners of land who make improvements and, by extension, generate its value. But land itself is a gift of nature. Its value is derived from its proximity to amenities created by others. Land Value Tax (LVT) is a levy charged on land, rather than the improvements. It recovers the socially created value of land and speculative gains on land prices, which drives real estate bubbles.
The corollary of LVT is that improvements made by owners are subject to minimal or zero taxation. Revenue from LVT might even provide a surplus which could be used to offset or abolish other, less desirable forms of taxation, such as business rates. In this way, LVT can help shift incentives from less to more productive activities.
Land Taxation in Northern Ireland
The current rating system in Northern Ireland came into force in April 2007. Rates are levied on the value of the whole property with no distinction made between the land value and the improvements. In addition, rates are levied on the basis of a domestic valuation of 1 January 2005. House prices have changed considerably since then.
It is clear that the current rating system has had little impact on house prices or behaviour and is merely a means of collecting some taxation revenue.
Proposals for LVT in Northern Ireland
In order to introduce a system of LVT, valuations would have to be disaggregated into the land component and the building component. This would involve adapting the current system rather than introducing a new system. LVT also requires comprehensive information on land ownership. The main task here would be to identify the owners of the 19% of homes that are currently in the private rented sector. The recently established Landlord Registration Scheme should help with this. In addition, a means of assessing the highest and best use of land is required as this is the basis upon which LVT is levied. This requires a more robust and transparent system of land use planning than is currently in place.
70% of land in Northern Ireland is agricultural. Agricultural land has been exempt from rating since 1929, creating a greater burden on other properties. Agricultural land should be incrementally brought into the net of a well-designed property tax system.
People who have low incomes and modest homes should continue to receive rates relief, as currently applied. A deferment scheme could be set up for people with low incomes but with expensive properties, whereby rates could be rolled over and paid when the property is sold.
Impact of LVT
Modelling of the potential yield impact of LVT suggests that it would redistribute the burden of property tax away from the west and towards the south-east of Northern Ireland. There is also a strong positive correlation between LVT and deprivation. In other words, LVT is a progressive tax.
Conclusions and Recommendations
For practical and political reasons, it is not recommended that a system of LVT be introduced immediately. However, Northern Ireland is in a good position to adapt the existing rating system by providing more regular valuations of land and by initiating split valuations of site value and of improvements. Once this is achieved, realistic pilot studies can be carried out to assess the impacts of LVT.
In the longer term, LVT could be introduced and used not only to prevent another real estate bubble but also, if more taxation powers are devolved, to reduce the incidence of other, less economically desirable taxes.
This report is part of a series of research on the Northern Ireland economy. You can see the rest of our reports here.
See also: Tax Land, Not Houses