In the UK, a new tax will raise funds for local infrastructure and new homes, says Gordon Brown. But developers are not convinced. Damian Cleghorn reports on RICS’ response to the Planning Gain Supplement (PGS).

When government announced plans last December to introduce a new tax on the profits made by landowners selling sites for property development, there were jitters throughout the building industry.

The Chancellor's aim is to generate £500m a year with his ‘Planning Gain Supplement’ (PGS) to help pay for schools, roads, health facilities and new homes.

PGS would top up the estimated £2.5bn already raised every year through local planning agreements (section 106s), whereby developers contribute to local infrastructure projects.

But those involved in the property business fear that the new tax would curtail rather than encourage development and result in less land being made available for housing.

RICS consulted its members on the PGS proposals and submitted a response to HM Treasury, requiring further clarification on a number of issues.

Apart from worries that PGS would hold up the planning process, there were concerns:

• that it may be more useful as a revenue-raising mechanism for large-scale schemes rather than smaller schemes;
• that the impact of PGS thresholds on small business developments was unclear;
• that the proposals neither spelt out how a large surplus of PGS would be used to finance infrastructure elsewhere, nor the degree of control that local authorities would have over revenues raised.

To gauge the possible impact of PGS, RICS and a number of other groups from the property sector commissioned some research.

Read the seven main findings of this research.

This was conducted by Knight Frank and involved several different case studies:

• nine residential developments;
• seven mixed-use developments;
• one industrial development
• one example of mineral extraction.

The assumption underlying the research was that if householder applications were excluded, PGS could apply to more than 300 000 applications in any one year.

Keeping options open
The research threw up more questions than answers. The findings suggest, perhaps, that there should be more investigation into other mechanisms for raising money to support infrastructure development.

This could include further analysis of the applicability of a tariff-based system/roof tax, such as that already in operation in Milton Keynes.

Jeremy Edge, planning partner at Knight Frank, says: "The results raise a number of important questions which need to be answered before there can be sufficient public confidence in the proposals for PGS, compared with the existing system of planning gain.’’

What impact the research will have on the government’s proposals for PGS is still uncertain – a government announcement is expected in the pre-budget statement in mid-November.

Damian Cleghorn is a Policy Officer at RICS.

This article appeared in RICS Business, November 2006.