Summary and implications

On 20 September 2010 Nick Clegg announced an intention to grant local authorities new borrowing powers, to allow them to borrow against predicted growth in their locally raised business rates. This is a positive statement of intent from the coalition government: after much lobbying, it’s finally ready to introduce tax increment financing (TIF) to the UK.

  • For developers with schemes that had been looking financially challenged, a new source of financing is about to be introduced.
  • For local authorities, the possibility of leveraging off future rates offers an innovative way to pursue regeneration.
  • The property and construction industry generally is in line to benefit: if successfully implemented, TIF could attract the investment the industry desperately needs.

Background

TIF is a funding mechanism whereby infrastructure is paid for today out of tax revenues to be generated tomorrow.

The theory behind TIF is that new infrastructure brings new development and with it additional tax revenues: businesses that move into the development pay business rates and stamp duty land tax. This additional tax is the ‘tax increment’ that TIF looks to capture.

At present, the public sector is struggling to meet the material upfront costs of infrastructure. TIF will allow the public sector to take into account the tax increment in its financial modelling. In doing so, it is believed that lenders will advance larger amounts than previously.

Catching up with the US

TIF is a well known funding tool in the United States, driving much of the country’s urban renewal. Some US states have been using a TIF model for over 50 years. In the US, TIF is generally used to plug the funding gap associated with the regeneration of ‘blighted areas’.

Whilst the US model is not without its problems, it serves as an example of TIF in operation and a UK TIF model should be able to learn from both the positive and negative experiences of the US.

Finally the Green Light?

When the previous government invited expressions of interest in TIF, the positive response signalled an industry with plenty of potential developments ready to benefit from TIF. The previous government announced an intention to set up a pilot TIF scheme, so as to see how a TIF would work in practice.

Until 20 September, the coalition government had not formally committed to the pilot TIF scheme, nor to the idea of TIF more generally. Whilst Scotland was making progress with TIF models, the position with the rest of the UK remained uncertain. Generally it was thought that the idea was going nowhere.

Nick Clegg’s announcement therefore comes as a bit of a surprise to the property industry. It is not yet known whether a pilot scheme will be implemented and which of the TIF models to the right will be preferred. Details and a timeline to implementation are due to be published alongside the Spending Review in October 2010.

Conclusion

Both the property industry and local authorities now look to the government to resolve the potential pitfalls and deliver flexible TIF arrangements that can fill the funding gap and kickstart developments across the UK.

Please click here to see the tables of Potential TIF Models and Potential TIF Pitfalls.