Reform of section 106 framework
Proposals for Affordable Housing Contributions
Purpose of the campaign
Future Housing is campaigning for reform of the law relating to private-sector contributions to affordable housing. The present planning system in England requires landowners and housebuilders to pay hundreds of millions of pounds by way of contribution to affordable housing. Around 60% of new affordable homes are funded through the framework created by section 106 Town and Country Planning Act 1990, which allows local authorities to seek contributions from land owners and housebuilders applying for planning permission. In most cases, if the applicant does not agree to make a contribution, planning permission is not granted. There is, however, no clear or transparent law to govern this form of taxation. While private-sector stakeholders in general accept that they should contribute a major part of what is needed, the present system is confrontational and has the effect of causing major delays, creating uncertainty and holding back housebuilding in England.
The objectives of our campaign are as follows:
- To abolish the anomalous system whereby the private sector contributes to affordable housing through requirements of planning policy;
- To promote a fair and transparent legal framework for private-sector contributions which is acceptable to private and public-sector stakeholders alike; and
- To lobby for appropriate legislation to be introduced in the the current Parliament.
Our proposals for a new framework are being discussed at high level by leading housebuilders and preliminary indications are positive. We believe that our proposals come closest to providing the big answer to housing supply issues that has so far eluded mainstream reviews. The aim of the campaign will be in keeping with our central philosophy: to promote a system that enables private and public stakeholders to work together for the common good.
What we want to do
In order to make it practicable to bring in reforms practicable in 2016, they need to be kept relatively simple. The proposals must also be structured so as to gain the trust of both private and public sector stakeholders. Our proposal for a new Affordable Housing Contribution comprises three parts. First, a tax; secondly and thirdly, rights for local providers to acquire dwelling-houses at special rates. Our suggestions are referred to below as AHC 1, 2 and 3 respectively.
AHC 1 : Tax
- The tax base is the gross profit of each discrete residential or commercial scheme for which planning is granted (or development permitted).
- The tax rate will depend on a number of characteristics in the development that the developer and the local planning authority will discuss, e.g. number of affordable units; tenure of affordable units; level of compliance with Code for Sustainable Homes. Incentives for preferred forms of development might be built in.
- The tax point for a given scheme will be set according to the number of units comprised in the development. For present purposes, let’s assume a scheme of 80 residential units and a tax point at two years after the grant of full planning permission or reserved matters approval.
- Provisions to cover advance AHC 1 tax payments on discrete phases of large projects may be envisaged.
- The tax will be assessed by HMRC and payable (in the case of our hypothetical scheme) no later than thirty months after the grant of full planning permission.
- Tax credits will be available for qualifying R&D expenditure on modern methods of construction.
AHC 2 : Rights of pre-emption
In order to deliver affordable housing units as such, further provisions are needed, for example:
- Local authorities (as housing authorities) and/or their nominated registered providers will have a statutory right of pre-emption (or right of first refusal) allowing them to purchase up to a certain percentage of each scheme at a discount.
- The relevant percentage of the scheme subject to pre-emption and the discount allowed will be determined by statute or statutory instrument. There may be regional variations to ensure that economic inequalities between cities and provinces are mitigated.
- At outline application stage the applicant will submit an indicative layout showing the units which are available for AHC 2 purchases. This will be refined as the application progresses, and a definitive layout and housetype schedule will be approved as reserved matters.
AHC 3 : Options to purchase
The following provisions cover the position where a planning permission is not implemented or the take-up of houses in a scheme is less than anticipated:
- In the event that any built or partially built units on the scheme remain unsold in the two months preceding the tax point, then the local authority and/or its nominated registered provider will have a statutory option to purchase them at the statutory discount.
- In the event that the land (or part thereof) remains undeveloped at the tax point, the local authority has the option to purchase undeveloped portions at the statutory discount, unless the applicant can show good reason for the failure to implement the permission.
- At outline application stage the applicant will submit an indicative layout showing the units which are available for AHC 3 purchases, which would probably be the same units and land area as are subject to the AHC 2 provisions. This will be refined as the application progresses, and a definitive layout and housetype schedule will be approved as reserved matters.
Computation of AHC 1 tax
The aggregate amount of statutory discount allowed by the developer under the AHC 2 and AHC 3 provisions will be deducted from the AHC 1 tax payable. If the amount of discount exceeds the tax assessed, then the developer may take a tax credit forward to another scheme in the same local authority area. If no such scheme has been implemented within two years of the tax point for the original scheme, then the developer would be able to apply the tax credit against income or corporation tax payable by his business. Importantly, it is intended that the overall burden on housebuilders and residential development land owners to contribute to affordable housing should not be increased beyond present levels.
Community Infrastrucutre Levy
It is important that the new system should not conflict with the Community Infrastructure Levy (‘CIL’). We envisage two parallel and complementary systems – CIL for infrastructure and AHC for affordable housing.
Application to Commercial Developments
Future Housing believes that the principles of AHC 1 tax should apply to commercial developments as well as residential developments. There is certainly no logical reason why the planning gain on such developments should not be taxed. The taxation of commercial developments will mean a significant increase in potential tax revenues for the provision of affordable housing.
The principal aim of the campaign is to seek support for our proposals from:
- Parliamentarians and policy makers – members of both houses of Parliament, Special Advisors and relevant members of the Civil Service.
- Private sector – landowners, master developers, housebuilders, consultants.
- Public sector – local and central government, registered providers of affordable housing, the Planning Inspectorate, Homes and Communities Agency.
- Representative bodies – Home Builders Federation; Confederation of British Industry; Residential Landlords Association; Number 10 Policy Unit; Local Government Association; National Housing Federation; Chartered Institute of Housing; Royal Town Planning Institute; Town and Country Planning Association; Royal Institute of British Architects; Royal Society for the Arts; National House Building Council.
- Think tanks – Institute of Fiscal Studies; Future Cities Catapult; Nesta; Centre for Policy Studies; Respublica Trust; Policy Exchange; Social Market Foundation; British Future; Centre for Cities; Civitas; Demos; New Policy Institute.
With a powerful Tory Government in place, there should be no reason to hold back on the vital reforms. Of course, other political issues will vy for precedence, but housing affects each and every individual who lives in the UK. There can be no justification for failing to look at the reform of a broken system now.
The reforms sought will deliver the following benefits for the public:
- The new laws will increase certainty for housebuilders and thereby create conditions for elastic housing supply.
- They will help to reduce significantly the time taken to process planning applications for large developments. (Presently around 73 weeks on average, mainly because of negotiations on the question of affordable housing contributions.)
- They will spread the contributions net to commercial developers.
- They will free up resources at all levels as the parties will no longer be required to argue about viability of a scheme at the outset.
- They will encourage better relations between housebuilders and planners, because affordable housing, the most contentious aspect of a large planning application, will no longer be a thorn in the side of both parties.
Our aims are focused on specific reforms that can help revitalise housebuilding in England. While everyone is casting around for answers, our proposed reforms are ready to be refined and brought forward quickly.
The desired outcome is to have support of major stakeholders, housebuilders and politicians for legislation to come forward in 2016 to enact new measures for affordable housing contributions along the lines we propose, subject to comments and observations of the people responding to the campaign.