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OPINION: The taxing issue of land re-zoning

OPINION: The taxing issue of land re-zoning

Friday 14 April 2023

OPINION: The taxing issue of land re-zoning

Friday 14 April 2023

Philip Syvret, one of the island’s leading property lawyers, considers the upcoming proposal to the States for a windfall tax on land owners whose land value sky-rockets following re-zoning for development.

At the stroke of a pen, or a voting button in the States Chamber, a green field used for cattle grazing can be transformed into a development site for housing.

At that stroke an area the size of a football field will increase from its present agricultural value of around £60,000 to a figure measured in millions.

That change in Planning status is of course not earned – it is in the gift of the Government – your government and mine, but at present, we get nothing in return for that gift. The landowner quite simply takes home a lottery-sized win.

Raluca Kovacs.jpg

Pictured: Reform Jersey’s Deputy Raluca Kovacs has called for the uplift in land value on re-zoning to be taxed at 50% with the revenue to be applied to community housing.

On the face of it that seems inappropriate.  Reform Jersey’s Deputy Raluca Kovacs thinks so, and has made a fresh call for the uplift in land value on re-zoning to be taxed at 50% with the revenue to be applied to community housing.  A simple and fair proposition that few could argue with surely?

For the past three decades I have sat at the coal face of the property market, representing the youngsters and families desperate to have the security of home ownership in their Island, as well as substantial property developers.  Re-zoning of land affects them both.  From my perspective, having represented both groups, I can see some of the potential difficulties that will arise unless this proposition is considered with the greatest of care.

A Little History

Jersey is not the first jurisdiction to wrestle with the unfairness of the landowner mopping up all the spoils of land value increases arising on re-zoning.  The 1947 Planning Act in the UK imposed a 100% levy on such increases.  The result?  It effectively killed off the speculative land market, reducing supply of new housing sites to a very low level.  A blunt imposition of tax is not going to help supply of housing, a nuanced system is needed.

Proposals for nuanced systems have been discussed in Jersey over recent decades, but have usually ended up on the “too difficult to do” pile in Treasury.  Instead, clawing back a share of the uplift in value has been had by way of Planning Obligation Agreements, requiring for example landowners to build a certain percentage of first-time-buyer or affordable houses on a newly re-zoned site.  A good start, but we can do better.

Tackling the Issues

The proposals for a windfall tax that have gone before have predictably met considerable resistance from landowners and developers.  There are also risks for want to be homeowners and Government in interfering with the supply of housing sites. Let’s step back and try to take a balanced view of some of the issues. 

The stock developers’ response to these proposals is that the proposed tax is an unfair grab from an industry that already pays more than its fair share to the tax man.  There is some validity in that argument.  The construction industry contributes significant revenues from its economic activity.  Subsidiary economic activity given by suppliers, lawyers, estate agents and stamp duty imposition add to that contribution.


Pictured: "A blunt imposition of tax is not going to help supply of housing, a nuanced system is needed."

The objective of the new tax is not however about increasing tax on existing income.  Instead its purpose is to share the benefit within the community of the unearned value generated by re-zoning which previously went to the landowner alone.  Arguably that objective is fair and any complaint that this is an increased tax on existing activity can perhaps be dismissed.

That said, not all uplift in value arises simply from Government re-zoning land on a whim.  Landowners and developers put in significant time and money to prepare and promote a site.  Architects, engineers and related professions contribute to the design and preparatory process at very significant cost.

A discount from taxation of all of the increased value needs to be applied at an appropriate rate so the speculative risk of that work is not discouraged.  If not, the private sector will not bring potential developments forward, reducing potential housing supply and foisting responsibility for proposals onto the public at public cost and risk.

The biggest contra argument will be that a new tax will increase the cost of finished houses.  Again, that needs to be examined carefully.  When assessing land values developers work backwards to calculate residual land value.  In simple terms, they look at the final sale price of the houses to be built on the site, deduct cost of building, deduct expected tax and other economic costs, deduct a rate of profit and what is left is the price they’re willing to pay for the land.


Pictured: "Landowners and developers put in significant time and money to prepare and promote a site."

At first blush, therefore if developers are going to have to pay a tax when they benefit from re-zoning it would seem that’s just going to come off the residual land value paid to the land owner and will not be added to the final sale price of a completed unit.  The completed unit will continue to sell at existing market prices. 

If only it were that simple!  Estimating the quantum of this new tax imposition is going to be difficult for a developer or landowner.  All of the calculations on residual land value are based on assumptions, informed by present market values and the experience of the developer.  Predicting future sale prices for houses and future building costs is fraught with risk.   Like any estimate it can go wrong. 

Given the glacial speed of re-zoning approvals in years gone by, estimates will have to be made years in advance.  A crystal ball would help!  Adding an unknown or at least a very difficult to quantify tax imposition could deter or delay developers and therefore slow delivery of housing units, a significant risk in an already under-supplied market.

Uncertainty in any land transaction does not help.  Given the element of guesswork that arises in assessing land value, the developer may deeply discount price offers to landowners to protect themselves from the risk of miscalculation.  Sellers of sites may be reluctant to sell at those discounted prices.  Again, the supply of sites becomes gummed up.

A solution envisaged in the Bridging Island Plan is for Government to be able to step in and compulsorily purchase re-zoned sites on which development has not started 3 years after re-zoning.  That solution is far from ideal - we want private enterprise to fund and carry risk in the speculative development of homes, not the tax payer.


Pictured: "Given the element of guesswork that arises in assessing land value, the developer may deeply discount price offers to landowners to protect themselves from the risk of miscalculation."

Invariably when a new tax or other imposition arises on property development, time and resources are spent with landowners and developers posturing over who will absorb that cost. I spent long hours in negotiations with landowners in previous years when the Planners first imposed the 45/55% requirements for open market/first time buyer homes to be built on re-zoned sites. 

Who will ultimately be the winner in negotiation relating to this new tax (if it is approved) remains to be seen.  There is an argument however that any new tax means new negotiation and therefore new delays in construction of the much-needed houses. 

Deputy Kovacs’s proposal suggests there will be no cost for the Public arising from this new proposal.  I respectfully disagree.  The assessment of a pre-zoning land value will need to be made.  In turn assessment as to post-zoning value is laden with complications.  In essence the tax man will need to calculate that residual land value discussed above.  He’ll need to assess the build costs, reasonable developer profit margin, the costs impact of any Planning Obligation Agreement – in effect stepping into shoes of a land purchasing department of a developer company, which departments are usually populated by large and organised teams of professionals.  Re-zoning won’t come up often.  The tax man will not have a permanent team to deal with these assessments and will need to outsource all this at cost.

Any scheme could of course direct how particular developments are built.  Could the tax rate be adjusted or be exempted where a site is for say entirely social rental?  Could we induce better design and size of housing units by reducing the tax if the units to be developed were a certain percentage above minimum size standards?  If we’re asking the law draftsmen to get to work on the tax rules, let’s take the opportunity to address some of the concerns we’ve seen in recent large developments.

Some Key Objectives

Many of these arguments will be deployed by developers and landowners.  They have validity and any legislation will need to address them.  My purpose in commenting on them here is not because I have a particular axe to grind.  Instead I want a swift and informed debate. Undoubtedly developers and the island community can reach a win/win position where the financial benefits of re-zoning are shared and new housing can be brought on.


Pictured: "I will watch the public debate with interest..."

I will watch the public debate with interest.  Ultimately, two things are vital.  First, the debate must be promptly moved on.  Nothing will prevent new sites being brought forward more effectively than uncertainty as to tax treatment.

Second, once a decision is made to tax or not – we must stick with it.  In the UK the coming and going of this type of tax has caused landowners to hold their land back on the basis that the opposition party will at some point come to power and repeal the tax that the previous government imposed.  That will utterly defeat the objective.  Solid support across the various political divides will be a key factor.

A tax that is efficient in operation, fair so that it does not hold back development sites and politically acceptable to all so as to be stable are the requirements here.  They are not easy requirements to fulfil!

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