National Taxation for Property Management and Valuation

A Macleary, A. Macleary

• Publisher: Taylor & Francis
• Year: 2003
• Print ISBN: 9780419153207
• eBook ISBN: 9781135833220
• Topic: Arquitectura
• Subtopic: Planificación urbana y paisajismo

A clear and up-to-date guide to the UK tax system for surveyors and valuers which demonstrates land valuation for taxation purposes.

Chapter One

INTRODUCTION

SCOPE AND PURPOSE OF THE BOOK

The taxation of property affects us all. People use land and buildings for all their work and leisure pursuits. Most importantly, people need shelter, and in serving that need over 200 000 houses are completed in Britain each year. To fund house purchases financial institutions lend money, and currently the building societies alone hold mortgages to the value of around £160 000 000 000. Property is also the object of commercial finance. About £30 000 000 000 is held in property investments by superannuation funds and pension funds. Property development companies have outstanding commitments of nearly £27 000 000 000 due to commercial banks. The construction industry turns over about £200 000 000 a year. Such figures give some indication of the scale of financial importance of land and new buildings. The initiation of development projects and transactions of interests in land are important in themselves and the effect of tax on holding, developing or trading in property can be critical when decisions are made on land use disposals. But it is not only the large financial institutions and property companies which are concerned about the incidence of tax on property.

For those who are employed in construction, property management or investment or those who find that they have to pay Stamp Duty on the conveyance of their house or Value Added Tax on their bill for hotel accommodation, the incidence of taxation on property is important since it affects their livelihood or their purchasing power. Those so affected include most of us, and most of us know very little about property taxation. People generally only seek advice on particular taxation matters as they need it.

For a relatively small group of people the taxation of land and buildings is a matter of more vital interest. This group will include commercial and professional people whose working lives are intimately connected with the tax system and with the position of land and buildings vis à vis the tax system. This group will include lawyers, counsel, accountants, surveyors and civil servants. This group knows about property taxation in considerable detail. It is the very stuff of their lives. They risk their reputations and earn fees by interpreting and practising tax legislation and in representing and advising clients regarding the incidence of tax and tax planning measures. They analyse leading judicial decisions and they prepare quality texts and highly detailed reference manuals. This group knows a very great deal about taxation and some of them are also experienced valuers.

Then there is a group of people who are concerned with the valuation, management, planning and development of land, and for whom the taxation of land is important in so far as it impinges on these activities, but particularly in respect of financial and land valuation implications. This group is made up of surveyors, valuers, estate agents, landowners, property dealers and developers. Some of these may have considerable expertise in land valuation for the purposes of taxation but the majority will command only a basic understanding of the general forms of taxation and the more significant rules in so far as they affect valuations.

This book is designed to be of value to this group of people. It is also intended to be useful to young people aspiring towards professional or academic qualifications in valuation and land management. The treatment of land valuation for the purposes of taxation is a necessary but inconvenient subject in their training or education. Taxation of land does not of itself require any different or unusual valuation methods or techniques. Valuation for taxation is not, of itself, worthy of particular recognition. Equally the knowledge of the taxation system required of the student is usually rudimentary and never likely therefore to form a significant part of any course of study. But basic knowledge is deemed to be essential and the application of land valuation for taxation is often used as an opportunity to inculcate the basic principles and forms of taxation in the student.

Because there is little challenge in either area of wider interest (valuation or taxation), correspondingly scant attention is given to the kind of published material which will be useful to students and practitioners of land management. A single foray into the excellent but voluminous and detailed tomes of taxation which are available is enough to deter even the most inquiring and conscientious of students or practitioners. This publication aims to provide the practitioner with a simplified and concise account of the main features of national taxation and land valuation enabling him/her to refresh existing knowledge and target areas for further more detailed investigation. For the lecturer and student a text is provided which will give a suitable background making prosaic instruction in the tax regime largely unnecessary while providing scope for more detailed concentration on worked examples of valuations and for tutorial discussion. For this objective to be achieved the text has to be one which students will find readable. (This can be a daunting challenge when the subject is taxation!) It is for this reason that the opportunity is taken to develop some wider understanding and theoretical approaches in certain areas. Surveyors and students will wish to see the relationship between taxation policy and practice with other areas of interest such as economics and land use planning.

In attempting to meet its objectives the text is selective in other areas. No aspect of the tax system, or of valuation for taxation is demonstrated exhaustively. There are very substantial omissions. For example the treatment of trusts has been almost totally neglected. The weight of treatment varies between certain areas. The justification for this unevenness of treatment and lack of detail is that the overriding objectives articulated above require that only those most important matters and points within them can be dealt with while keeping the text at a simple, salient and introductory level.

The reasons for producing a text which intends to meet these objectives, at the present time is, paradoxically, because the taxation system has become simpler in recent years. After ten years of a Conservative administration much has been done to reduce the even greater level of complexity which obtained previously in respect of taxation. Taxation rates have been reduced and harmonized between income and capital. Many impedimenta such as personal reliefs, capital allowances and tax bands have been removed or reduced. There is a clear policy orientation towards taxes on consumption and away from taxes on income. Measures such as the Development Land Tax Act of 1976 have been repealed and others such as Value Added Tax have been extended. Curiously, relief of tax on mortgage interest repayments remains. So far as the entirety of taxation is concerned such changes could be considered to be marginal but they reflect a profound philosophical change which in combination with other government policies encourages individuals and corporations to deal with assets such as land and property in an increasingly liberal and taxneutral environment, more likely to stimulate enterprise and encourage private led mercantile growth in a supply-side economy. As a corollary, such an approach eschews societal problems and the application of welfare economics and concomitant taxation measures, such as betterment taxation.

These changes are substantially reaching fulfilment at the present time and the application of taxation in respect of all income and capital, including that deriving from land, is sufficiently distinctive to require a complete restatement of the overall position rather than a fragmented update of a relatively large number of different changes. Hopefully therefore the book will be a convenient source of reference which will remain relevant for some time. That having been said there will clearly be changes in detailed matters such as the level of personal reliefs. Some more significant changes may occur. For example, Value Added Tax has been extended to the construction of new commercial buildings in observance of European Community tax harmonization policies. So far as one can see, however, there would appear to be hope for a period of fiscal stability and the taxation measures for land and its valuation should not change significantly therefore from the schemes and methods set out in this text.

This attempt to present a unified picture of the present tax system is also useful since it includes an update within a comprehensive background of the various events and legal decisions which have a bearing on continuing practice in valuation for taxation. As well as outlining the taxation system and highlighting features affecting land and land valuation, the text also includes reference to leading and latest cases so that guidance is given as to judicial thinking in certain areas. Pursuit of this information can often require a determined hunt for information embedded in more highly detailed and comprehensive texts.

The method by which the book seeks to achieve its objectives is firstly to introduce the reader to the broad concepts which lie behind applied taxation measures so that a general understanding of the purposes of taxation and of the British tax system in particular is obtained.

In this section as in the rest of the book it is assumed that the reader has a pre-requisite knowledge of the basic principles of economics and of legal systems. Such knowledge will be available to surveyors and students of land management but the lay reader ought not to have difficulty since care has been taken not to be unnecessarily technical in these areas. However, later parts of the text assume levels of expertise in land valuation and of understanding of planning theory and legislation which may make certain passages or illustrations more obscure for the lay reader.

The text then goes on to examine specific taxation measures. Income and corporation taxes are outlined in Chapter 3 where the more important aspects of income from land are dealt with. Capital allowances, now much diminished in importance as a form of relief from taxation, are dealt with in Chapter 4 and the relevance to property demonstrated. Taxes on expenditure (Value Added Tax and Stamp Duty) so far as they affect land are detailed in Chapter 5. Chapters 6 and 7 cover Inheritance Tax and Capital Gains Tax respectively as the two principal surviving measures for the taxation of capital. As previously, the particular application to property is demonstrated.

Chapter 8 represents a departure from the general form of the book. It deals with the taxation of betterment. Development Gains Tax (Finance Act 1974) and Development Land Tax (Development Land Tax Act 1976) remain collectable on outstanding cases where the charge to tax ocurred before March 1985. However, this is not the justification for the inclusion of this chapter. There is no current betterment tax and outstanding settlements will be increasingly rare.

The reason for the inclusion in Chapter 8 of an extended discussion on betterment taxation is because, firstly, betterment taxes are the only taxes that relate exclusively to land. Secondly, as taxes on development value they are amenable to the expertise of surveyors and valuers who will have knowledge and understanding of planning law and practice, property development and finance, property investment and appropriate valuation techniques.

Students of land taxation and of valuation for the purposes of taxation will benefit from an understanding of the theory and mechanism of attempts to tax betterment. Since the tax is theoretically uncontroversial and since attempts to recoup betterment have had a resilient history over the last forty-odd years, then all of those concerned with land valuation and taxation may find it useful to have a convenient summary of these attempts and some more detailed understanding of the operation of development land tax.

Since a primary purpose of the book is to address the needs and demands that national taxation legislation requires in respect of the value of land and buildings in a wide variety of taxable situations then Chapter 9 devotes special attention to these expectations.

Finally, a partial view is taken of the interaction of taxes in a selected sample of taxable situations with special cognizance being made of land and interests in land together with some of the consequences for land valuation. Here also the opportunity is taken to highlight some of those concepts which are introduced in Chapter 2, such as the need to distinguish between capital and income and investment and dealing. This chapter only attempts to illustrate the taxation consequences of transactions or taxable events and then only to a level of primary consideration. To attempt to be both comprehensive and exhaustive in depth would be inappropriate. It would then be necessary to carefully construct a detailed map through alternative taxation routes under a large number of headings. Such a task is better left to the taxation expert. This author merely wishes to be a guide through the lower slopes, providing a general map of the terrain ahead and who illustrates difficulties and complexities by pointing to one or two minor peaks in the range.

The completeness of this text therefore is not in its coverage or level of detail. It is deficient in both of these qualities. Rather it is in its appropriateness as a source of introductory information to a readership knowledgeable in related fields. The book has been designed for a purpose. It is hoped that those who perceive the purpose may gain most from the text’s utilitarian approach.

Chapter Two

THE BRITISH TAX SYSTEM

INTRODUCTION

Before going on to consider particular forms of taxation, it will be useful to have a general understanding of the scope, form and administration of taxes in the United Kingdom.

The taxation system which will be described for the United Kingdom is that which covers England, Wales, Scotland, Northern Ireland and the Scilly Isles, but which excludes the Channel Islands and the Isle of Man.

The taxation system which we shall examine is therefore unique to the United Kingdom. By an important aspect of the Treaty of Rome, particularly articles 95 and 100, the United Kingdom surrenders a modest part of parliamentary sovereignty to the European Community. These provisions are mainly ones designed to prevent discriminatory taxation as within member states. More progressively they give the EEC the power of harmonization of taxation within member states by the use of directives. In this way for example uniformity in the application of Value Added Tax and of Company Taxation is being undertaken. It is also true that the EC itself can raise taxes. EC revenues derive in part from a proportion of VAT, customs duties and agricultural levies collected in the UK.

However, for present practical purposes it can be accepted that tax in the UK can only be imposed by statute by the will of parliament. Equally the expenditure of money by parliament can only be made following a vote on a ministerial financial resolution.

Government spending and the raising of revenues to meet the expenditure therefore requires the sanction of parliament and in particular the House of Commons.

THE PURPOSE AND FORMS OF TAXATION

Clearly in a highly developed economy taxes are required for a very wide variety of purposes. Generally, taxes are needed to pay for items of collective expenditure. For example, the national expenditure on defence, social security or government administration will need to be paid for by taxes. Equally, local expenditure of the same kind which would include education, housing and the administration of planning and estate management services for example would again depend on monies raised through the taxation system to pay for these services.

Taxation can be used as a means of compensatory finance in order to attempt to influence the economy at the macro level. Hence measures of taxation may be used by governments to deal with such key macroeconomic variables as inflation, or the level of unemployment, although ‘fine tuning’ of the economy along simple Keynesian lines appears to be elusive, particularly in the absence of a good understanding of the effect of taxes on income distribution and economic efficiency.

All such expenditure including government borrowing is met from monies levied through a variety of forms of taxation. National expenditure is met from Income Tax, Corporation Tax, Capital Gains Tax (CGT), Inheritance Tax (IT), Customs and Excise duties, Value Added Tax (VAT), motor duties and so on. Local expenditure is met from a Community Charge together with taxes on business property, (rates) and grants from central government. The sources of tax revenue from the seven years to 1989 are shown in Table 2.1.

It might be supposed that such an impressive collection of taxes was based on some coherent structure evolved over a considerable number of years reflecting accepted principles and sound practice. In fact little is actually known about the benefits of public expenditure and for this and other reasons it is difficult to make sound decisions as to whether a tax base should be predominantly directed at income, wealth or consumption.

Political ideas about equity and wealth distribution vary, and can often be dogmatic. Any observer of tax legislation since say the Second World War would be impressed with the variety of changes which have been implemented, particularly in respect of income or capital gains from property. Efforts to introduce and subsequently dismantle concepts such as the taxation of development rights are extreme examples of this process.

Certainly there are classical principles of taxation. Those which are generally agreed to be appropriate are those which were adumbrated by Adam Smith in 1776. These suggested that a just and equitable taxation system should have the following attributes:

1. Equality, that is that the contribution to tax should be in proportion to the individual taxpayer’s income.
2. Certainty of amount, time of payment and manner of payment.
3. Convenience of payment to the tax payer.
4. Economy in the collection of tax.

Table 2.1. Inland Revenue and Customs and Excise Duties

These might be seen to be sound principles which could therefore stand the test of time. Although modern principles of taxation might also address the benefits to the system which may be gained through qualities...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• ACKNOWLEDGEMENTS
• ABBREVIATIONS
• Chapter One: INTRODUCTION
• Chapter Two: THE BRITISH TAX SYSTEM
• Chapter Three: TAXATION OF INCOME
• Chapter Four: CAPITAL ALLOWANCES
• Chapter Five: TAXES ON EXPENDITURE
• Chapter Six: INHERITANCE TAX
• Chapter Seven: CAPITAL GAINS TAX
• Chapter Eight: BETTERMENT TAXATION
• Chapter Nine: LAND VALUATION
• Chapter Ten: TAXABLE SITUATIONS AND TAX PLANNING
• TABLE OF CASES
• TABLE OF STATUTES
• APPENDICES