Ministers hope their proposed planning gain supplement, which has been given a roasting by a RICS report, will capture about one-fifth of the uplift in value generated by development.

Building has learned that the government aims to use the PGS to capture an estimated 20% of the value of any uplift generated after planning permission has been granted. That share will be taken out of the value left over after development costs have been taken into account.

The ODPM expects to generate £1-2bn a year from the tax, which was a recommendation in Bank of England economist Kate Barker’s housing supply report last year.

The ODPM has begun to outline its ideas at meetings with lobbying groups over the past fortnight. It has said it will publish its proposals on PGS as part of its response to the Barker review in chancellor Gordon Brown’s pre-Budget report, which is expected to take place next month.

The PGS is likely to be one of a number of options for capturing land value uplift that the government will consult on. But research published by the RICS last week described the supplement as “seriously flawed”. The study, which was carried out by former RICS tax panel chair Tim Johnson, concluded that the “PGS, as proposed, is based on a misunderstanding of how land is valued, how planning gains arise and how the property market operates. It is, therefore, seriously flawed”.

It also says that the proposed measures will require cross-party political support to succeed. “Ideally, a system is required that has wide political support, and that is also acceptable to the property industry, and where differences are of detail and not of fundamental principle. PGS is not such a system.” It says that Barker’s proposal will have to be “radically changed” to make it workable.

It goes on to suggest that the tax should be paid not when permission is granted, but when the property is sold or let. But doing this would involve valuing all affected sites, adding a layer of complexity that has doomed previous attempts.

The PGS as proposed is based on a misunderstanding of how land is valued. It is seriously flawed

RICS report, 14 October 2005

The report recommends that instead of the PGS, the government should beef up the section 106 tariff, or “roof tax”, being pioneered in Milton Keynes.

Bill Brisbane, managing partner of planning consultancy Roger Tym and Partners, said he agreed with the RICS’ analysis of the PGS. Brisbane, who has been involved in the masterplanning of several of the South-east growth areas, said: “If they are going down this route it will take time to implement, and landowners will hang on to their land. It will also give no incentive to local authorities in growth areas to grant permission.”

But in a speech to Buckinghamshire business leaders last week, Barker defended her proposal and criticised the RICS’ preferred option. “A tariff would of course be inflexible and so tend to be pro-cyclical as it would bear more heavily on developer profits as land values fell.”

In her speech, Barker also questioned whether the government should retain its existing target that 60% of all homes should be built on brownfield land.

“At issue is whether as a population we really see smaller houses in more compact towns as a price worth paying for the preservation of the openness and character of rural areas,” she said.