Developing a bonus culture

The New Homes Bonus is the government’s flagship scheme for incentivising communities to approve development. Peter Stevens explains how it works.

The government's proposals for a New Homes Bonus payable to local authorities have been trailed for several months by ministerial statements and press reports. An announcement in early August confirming that a New Homes Bonus scheme would be introduced did not in fact confirm the previously stated intention to match the council tax on every new home with payment of an equivalent amount as grant, to the local authority, annually for six years.

This broad approach has, however, recently been confirmed by the detailed proposals set out in the Department for Communities and Local Government`s consultation paper (November 2010), which is primarily addressed to local authorities for views on the detailed workings of the arrangements. It applies to England only.

The underlying purpose of this new grant is to provide local authorities with an incentive to deliver new homes, a commitment made in the coalition agreement published in May. The government`s view is that new housing places a strain on public services and consequently local authority revenue is spread more thinly, and so the new scheme will reverse this by providing a positive incentive for new homes to be built, particularly at a time of removal of other forms of funding from central government.

Other features of the proposals

In line with the government`s localism agenda, the grant received by local authorities will be "unringfenced", as the consultation paper puts it, so that there is freedom to use the funding, if the authority wishes, for improvements to local services or facilities that could be regarded as compensating local communities for the impact of new residential development.

The paper states that the government expects local councillors to work closely with their communities, and in particular the neighbourhoods most affected by growth, to understand their priorities for investment and to communicate how the money will be spent and the benefits it will bring.

In addition to the government`s matching of council tax in relation to each new home – the details of the calculation are more complicated but this is the principle – it is confirmed that there will be an enhancement payment of approximately 25% for affordable homes.

The consultation paper also seeks the views of local authorities on whether the scheme should extend to empty homes brought back into use.

The amount of the grant in outline

The basis of the grant to be paid to the local authority is that it will be an amount equal to the national average for the council tax band of each additional property. The calculation of the national average is rather more complicated than averaging the council tax for a particular band for every council tax charging authority across the country and is a more genuine national average. The scheme uses council tax band D as the benchmark. Council tax bands A-C and E-H are calculated or assessed by local authorities by reference to a standard ratio in relation to band D. By way of illustration, the ratio of band H to band D for setting Council tax is always 2:1, whilst the ratio of band A to band D is 6/9:1. Similarly for the New Homes Bonus, the amount payable will be adjusted by the relevant ratio according to the band in which each additional property falls.

The consultation paper identifies the current national average band D figure as £1,439.

For affordable homes the enhancement payment paid additionally will be a standard figure, regardless of the council tax band of the property.

Proposals for calculation of the amount

The proposal is to measure the number of additional houses constructed in the local authority area in each year by reference to the Council Tax Base form submitted by the local authority for that year. These forms identify the total numbers of homes in each council tax band and (after some refinement that is being consulted on) these numbers are adjusted to the band D equivalent by applying the relevant ratio – i.e., by way of example, a new home in band H is treated as if two new dwellings in band D. The net increase for the year (assuming the change is an increase) is then to be calculated by deducting the band D equivalent for the preceding year (as shown on that year`s Council Tax Base form) from the corresponding figure for the relevant year.

As a result of this process that makes adjustments to take account of the council tax band of the new homes, the financial reward for the construction of larger, family houses would be greater than for flats or smaller houses, and the government hopes that this will provide an incentive to meet the need for larger properties rather than give encouragement to grant planning permission at a higher density, as would be likely to be the case if the grant was payable simply by reference to the numbers of new homes. As indicated above, the effect of the adjustments on the Council Tax Base forms is that the bonus payable in respect of a band H dwelling will be twice that for a band D dwelling. Currently the national average band D figure is £1,439, so this will be the annual amount of the bonus for a new band D home, whilst double this figure would be payable for a band H home.

The grant referable to each new home will be paid annually for six years.

These payments will also apply to affordable homes (as currently defined to include social rented and intermediate housing but to include the new forms of affordable homes which the government has recently proposed) but in addition local authorities will receive an  affordable homes enhancement. This is proposed to be set initially at £350 (being approximately 25% of the national average band D figure), similarly payable annually for a period of six years.

Since the calculations rely on returns to central government and official statistics on additional affordable housing, there will be a time lag before payment is made to the local authorities.

Under this scheme there will initially be a gradual build up in the amount of revenue. Once the scheme has come into operation – the DCLG has set aside nearly £200m for 2011/12 – the amount of the grant in year 1 of a local authority benefiting from the scheme will be repeated in years 2, 3, 4, 5 and 6; in year 2 the additional grant attributable to the additional homes constructed in this subsequent year will be paid and repeated through to year 7; by year 6 and subsequently there is obviously the potential for the grant to reflect the additional amount of housing constructed in each of the six years up to that year. The scheme is intended to be permanent.

In areas of two tiers of local authority, the proposal is to split the payment of the bonus between the two tiers (except in the case of London) with 80% to the lower tier (the authority making the planning decisions) and 20% to the upper tier (in recognition of its role in the provision of services and infrastructure). In London the full amount will go to the London borough. The paper suggests that the proposed tier-splits are a starting point for local debate, so that account can be taken of the needs of local neighbourhoods and communities.

Peter Stevens is a partner at Clarkslegal. He can be contacted on 020 7539 8065 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..