A Guide To The New Infrastructure Levy: Balancing Benefits and Concerns For Affordable Housing

The UK Government recently enacted the Levelling Up and Regeneration Bill, which introduces an Infrastructure Levy to replace the existing Community Infrastructure Levy (CIL). Its goal is to increase funding for local authorities to invest in infrastructure and affordable housing. While the levy aims to raise funds for affordable housing, some stakeholders have raised concerns about potential unintended consequences. However, with careful implementation, it may be possible to realise benefits while minimising risks.

How will the new Levy Work?

The Infrastructure Levy will charge housing developments the levy based on final value, rather than per square metre like the CIL. The national rate will be £50 per square metre for residential builds. Developers pay the levy in phases upon occupation, rather than at commencement.

The government states this value-based approach will raise more revenue than the CIL in high-value areas. The £50 rate is lower than CIL rates exceeding £200 per square metre in cities like London and Oxford. However, it matches or exceeds old CIL rates in many regional towns, and it is believed that local authorities will retain at least 60% of funds raised, compared to just 25% under the CIL.

What are the Potential Benefits of Affordable Housing?

According to Housing Secretary Michael Gove, the levy will generate over £5 billion for local projects. Councils retaining more funding can invest in affordable housing where needed. Self-build homes and developments with over 40% affordable housing will be exempt from the levy, potentially incentivising the delivery of affordable housing further.

Concerns over Increased Costs

Some analysts and developers do worry increased costs from the levy could get passed on from landowners to affordable housing providers, who operate on slim margins. A 2021 London School of Economics study found strong evidence for such costs passing through to affordable housing providers under the CIL and earlier payment requirements add uncertainty over final valuations and costs, potentially dis-incentivising affordable housing projects.

Potential Safeguards and Monitoring

If passed through, there are concerns that increased costs could hamper affordable housing within residential developments. Targeted exemptions, however, when affordable housing exceeds a set threshold could help avoid this with the help of a dedicated fund. Simon Lee, an affordable housing researcher at the Institute for Public Policy Research, recommends ring-fencing at least 20% of levy funds raised specifically for affordable housing projects.

Careful monitoring and proportional policy responses will be critical if unintended impacts emerge. With balanced implementation, the Infrastructure Levy can hopefully deliver increased infrastructure funding without further exacerbating the UK’s housing affordability crisis.

How can it be ensured that the Levy Delivers for Affordable Housing?

The levy aims to raise substantial funding for local and national infrastructure projects, including affordable housing. Valid concerns have, however, been raised about the levy increasing costs and dis-incentivising affordable housing development.

Targeted exemptions, safeguards and monitoring will be essential to ensure the levy generates funds without adversely impacting affordable housing supply. Some specific policy proposals that could help strike this balance might include:

• Ring-fence a mandated percentage (say, a minimum of 20%) of Infrastructure Levy funds raised for affordable housing projects. This would provide a dedicated funding stream.
• Implement variable levy rates based on local land values rather than a flat national rate. This would account for viability differences across regions and prevent over-burdening schemes in lower-value areas.
• Provide full levy exemptions for schemes delivering over 35% affordable housing. Partial exemptions could apply for schemes between 20-35% affordable. This would incentivise developers to maximise affordable dwellings.
• Allow affordable housing providers first access to land released by public sector bodies such as central and local government. This would make it easier to avoid paying passed on levy costs.
• Produce annual reports monitoring the levy’s impacts on affordable housing supply and reviewing the exemptions and provisions in place. This will allow policies to be calibrated to prevent unintended consequences.

It is clear that with careful tracking and adaptive policy responses, the Infrastructure Levy may well achieve its aims of raising funds for communities while also delivering genuinely affordable housing where it is needed most. But it does require the government to listen to concerns, actively monitor impacts, and implement appropriate safeguards.