Land tax will target housebuilders' profits

The move, which may raise hundreds of millions of pounds, could be announced by Gordon Brown in his pre-Budget report in November. A consultation exercise would follow before a final decision on the level of the new tax is taken. Individuals as well as developers could be hit by the tax, which would be paid at the moment when planning permission is granted for housing. In an attempt to stave off criticism that the plan would encourage building in the green belt, there could be a lower rate of tax for land in brownfield sites.

Although the proposal could be controversial, the money raised would not be retained by the Treasury but would be ploughed back into plans to revive local communities by providing housing and improving services. Part of the receipts could be earmarked for local authorities.

Planning approval for homes to be built can vastly increase the value of land. A study for the Government found that the value of farmland in the South-east would increase from £9,122 to £2.7m per hectare when it could be used for housing. In the North-east, the value would rise from £7,534 to £1.2m and in the east Midlands from £7,450 to £1.8m.

The idea of imposing a tax on a landowner when planning permission is granted was first mooted by Kate Barker, a member of the Bank of England's Monetary Policy Committee, in a review of Britain's housing needs in March last year. It has now won the support of Mr Brown and John Prescott, the Deputy Prime Minister, who is responsible for housing and planning.

While ministers would normally be wary of imposing a new, highly visible tax, they believe that the proposal can be justified on the grounds that part of the big windfalls now being enjoyed by the private sector should be used to finance the public services that new housing developments will need.

Land is already subject to capital gains tax. Ms Barker argued in her report that the forms of development gains tax that had been tried in the past had failed because they distorted behaviour and raised less money than expected. Large landowners and speculators managed to avoid the tax but smaller landowners were hit.

She said the proposed tax would have to be accompanied by transitional measures to soften the blow for developers, with land sales contracts drawn up before it was introduced and for those holding large amounts of land for which planning permission has not yet been given.

But the plan will be opposed by the Tories, who warn that it would provide an incentive for developers to build expensive executive homes in the green belt.

Yesterday, the Tories accused Mr Prescott of breaking a pledge that a revaluation of business rates would not raise any extra revenue after figures showed companies were paying an extra £1.2bn a year in England.

Caroline Spelman, the shadow Local Government Secretary, said: " Business rates, like council tax, are being used as a stealth tax.

"Thanks to John Prescott's rigged rates revaluation, local firms are being taxed to the hilt, taking the average bill to £10,000 for the first time." She warned that householders would be hit when a revaluation of council tax took place.

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