The Barker report recommended a substantial increase in the number of new houses to be built to meet the demographic need for dwellings. In turn, this requires increased expenditure to fund the infrastructure required - from roads through to schools.

The Government is proposing that infrastructure costs be funded by a new tax called a Planning Gain Supplement (PGS) and have issued a consultation paper.

At the moment, many developers, to obtain planning permission, are required to enter into ‘Planning Agreements,’ otherwise known as s106 agreements. These agreements, in effect, attach covenants to the land and may, for example, require part of the site to be developed for social housing.

They often provide for what is called commuted payments. These are payments to be made by the developer and usually relate either to future maintenance of on-site facilities that are to be taken over by the council (such as play grounds or open space) or to the provision of infrastructure. It is this second issue which the proposed PGS is intended to replace.

At the moment the payments are required to be related to the impact of the development on the community. For example, for a residential development, an estimate will be made as to how many additional children of school age will result from the new houses. The payment required under the 106 agreement should equate to the cost of providing those additional places in the local schools.

PGS moves away from the impact of the specific development on the community to the concept of taxing the uplift in value of the land resulting from planning permission being granted. The consultation paper gives examples of this uplift eg agricultural land worth a little over £9000 per hectare can jump to £2.4 million once permission for residential development is granted.

It is envisaged that PGS will be collected centrally and then re-distributed locally which could well divorce the funds even further from the local impact of development. It is not envisaged that this tax will be implemented before 2008.

Past attempts at development land tax have turned out to be rather complex. With careful tax planning they were often avoidable but this increased the cost of transactions. Where avoidance was not an option, many land-owners simply held onto their land, waiting for the tax to be abolished - which it soon was.

Many are expressing concerns that rather than providing monies to develop community needs, PGS will instead put a brake on development. It is too early to forecast its impact as there are many blanks left to fill in - not least of which is the rate at which this tax will be levied.

For more information contact Malcolm Poynter on 01635 521212 or malcolm.poynter@clmlaw.co.uk