The urban white paper published two weeks ago outlined a number of measures designed to give a fiscal backbone to the government's ambitious plans. But will they have the desired effect?
Our Towns and Cities: The Future, the urban white paper, published on 16 November, sets out a series of initiatives to encourage urban living. It addresses two main issues. First, the concern that the exodus to rural areas will damage the environment by increasing development. Second, the need to meet the government's projected requirement for new homes. This is based on both population growth and changing needs, with people living longer, starting families later and often living in smaller family units.

The initiatives aim to counter people's apparent reasons for moving away, including the desire for a better general environment, and a higher standard of schools, healthcare and safety. Part of this package is fiscal. In this article we look at what possible impact they may have in bringing about the urban renaissance.

Capital allowances of 100% for creating flats over shops
The measure is intended to encourage the use of vacant or under-used space over shops by providing capital allowances on the cost of creating flats for letting in urban centres.

Whether it is taken up or not will depend on the likelihood of obtaining a letting, and therefore the demand for flats. In certain areas where demand is high this initiative may increase supply rapidly as the work involved can be carried out fairly quickly. Whether owners are happy to carry out work on a speculative basis in run-down areas will depend on whether the allowances can be set against the general profit of the business, or are specifically tied to income from the letting of the property.

Other unknowns are what costs will be considered eligible, and to which areas the allowances will apply. One would hope that all costs associated with the creation of the flats, including fees for professional services and local authority requirements, will be eligible. The cost of providing separate access and escape facilities for the commercial and residential parts of a building could be high. Geographically, the question is whether the measure targets run-down areas or all urban areas.

The overall effect of this measure would be to reduce the tax burden on the owner. Assuming a standard rate of corporation tax (30%), the allowances would cut the cost by that amount. However, this assumes that the property owner makes enough profit to offset it against the allowances.

VAT reforms
Two VAT reforms are proposed, one to encourage the conversion of property to residential use and the other to remove the VAT burden on renovating residential properties that have been empty for 10 years or more.

The proposal for conversions is to impose a 5% VAT rate on the works rather than the standard 17.5%. However, there is no long-term VAT burden on commercial-to-domestic conversions as developers can recover the VAT if they make VAT zero-rated freehold sales or leases over 21 years. Therefore, the 5% VAT rate would simply act as a marginal cashflow advantage for the duration of the works.

But the measure may benefit those who intend to provide short-term lettings, and would otherwise not be able to recover VAT.

Developers are already permitted to zero-rate works if they can establish that a previous residential property has been unoccupied since 1 April 1973. As this is becoming increasingly difficult as time goes by the introduction of the 10-year VAT rule will significantly increase the number of empty properties that could benefit.

However, the stock of usable properties that have not been occupied for 10 years may be restricted, as they are likely to be in such poor repair that it would be more attractive to carry out VAT zero-rated demolition and new build, rather than renovations. A more beneficial empty period may be five rather than 10 years, which would free up more stock in better repair.

There are often good reasons for the demise of an area and it takes much time, money, support and good fortune to halt the process

A further commitment has been made to explore the scope of reducing VAT for repairs to listed buildings used as places of worship, but nothing more solid has been stated.

Stamp duty exemptions
The effect of the proposed stamp duty exemption for disadvantaged areas will depend on how widely it is applied when the details are drawn up. The areas chosen may be close to those on the recently published assisted areas map.

In the case of large property or land transactions, stamp duty can add up to 4% to transaction costs. Exemption will reduce costs and consequently assist with viability exercises for development or redevelopment projects in the eligible areas.

However, individual shops, houses and flats located in depressed areas may be worth less than £60 000, so they would already be exempt from stamp duty. Therefore, this measure may have a limited impact on individual housing and small commercial units.

Tax relief for cleaning land
Again, the devil may be in the detail here, as all we have so far is the broad statement that investors will be able to obtain immediate relief on the clean-up cost.

The tax credits proposed are likely to be available at a rate of 100% of the costs involved, again assisting with project viability.

But what will they be given for and how will they be targeted geographically? Could eligible works range from the refurbishment of existing unused property to dealing with serious land contamination caused by years of heavy industrial use? Could they be available for otherwise commercially viable but vacant sites in central London? And if not, how will the legislation discriminate? In the past this has been an area where some grant assistance has been made available, so it is not clear at this stage whether there is a change of emphasis or whether this measure simply provides additional support.

Will these financial measures help?
There are often good reasons for the demise of an area and it takes much time, money, support and good fortune to halt the process. Another difficulty is creating an environment where commercial and residential communities coexist where, in the past, one precluded the other. Location is the single most significant consideration for many investors, so the enhancement of any environment is essential in creating the right atmosphere to encourage commercial and residential investment.

The financial incentives proposed are unlikely to create this environment but they are part of a wider set of initiatives in the white paper so they could tip the balance. Many may still feel, however, that they are not sufficient to encourage more than a small minority of investors that the likely returns are worth the risk. As with all tax incentives, there will be administration costs that cut into profit.

The proposals have generally been welcomed, and the many policy groups campaigning for fiscal regeneration measures have previously suggested that changes of this type would be of benefit.