"Land-only rental" value or "site premium"

In an ideal world, Land Value Tax would based on the land-only element of the rental value of each plot, assuming optimum permitted use.

This is perhaps an unfamiliar concept to most, and LVT's detractors hit back by saying that if you have a plot of land with no building on it, its rental value will be negligible, which is why we refer to the "site premium". i.e. physically identical buildings (for example, a three-bed semi-detached house) in different parts of the UK will have different rental values. The extra rent commanded by the more expensive ones is down to the "location, location, location" and that is the "site premium" and the tax base for LVT.

Alternatively, we can establish the gross annual rental value and deduct an estimate of running costs, of say £4,000 for a semi-detached house with correspondingly smaller or larger amounts for smaller or larger homes.

For simplicity let's initially assume that all UK residential plots are being put to their optimum permitted use i.e. that for which they have planning permission. This is probably true for 95% of all plots. The other 5% are plots with derelict buildings on them; plots with useable buildings on them which are unoccupied; and there are around half a million plots which have planning permission but which have not been developed yet. Of the 95% which are actually being used (which have buildings on them up to the current permitted limit), there are only a few per cent at the top end (small building, big plot) where it would be economically/commercially worthwhile replacing an existing building with some smaller houses or flats (with or without LVT). So for valuation purposes, the working assumption is that they will be taxed on their current, actual use.

Here are five more or less identical three-bed semi-detached houses from the first, fourth, fifth and tenth deciles, with one from the top one per cent for luck (downloaded February 2013):







Once we've established the site premium for the first house, the rest is just subtraction. The difference in rental values relates purely to the "location, location, location"/the site premium