Description of the HART Credit

UK Housing And Regeneration Tax Credit: Key Elements

What is the HART Credit?

The Housing And Regeneration Tax Credit (HART Credit) is a pound-for-pound reduction in investor tax payable – capitated, allocated, and competed for – that is earned upon completion of an urban regeneration or affordable housing property.

Overall goal of a HART Credit

The HART Credit will:

Stimulate private investment that engages the local community and be a catalyst for neighbourhood renewal in places of market failure, specifically:

Neighbourhood renewal areas
Areas of affordable housing shortage

Deliver ongoing affordability in high-value areas of strong market demand.
Facilitate regeneration of historic properties.

More flexible than grants

HART Credits are property-based awards that are predicated on levering other resources and are funded only after the development is completed. As such, HART Credits will engage the local community in places where the regeneration/ affordability goals otherwise will not work.

Step change in resource delivery

Tax credits generally, and HART Credits in particular, have proven a superior vehicle for government resource delivery into affordable housing and urban regeneration programmes, because they:

Pay for performance: before, during, and after development.
Transfer development risk from government to sponsoring entities.
Bring in market mechanisms and market forces.
Are provided via a permanent tax mechanism rather than a vulnerable appropriation method that counts against PSBR.

Easy for government to administer

An eligible sponsor developing an eligible property secures an allocation of (future) HART Credits from a government allocator (e.g. the RDA) via a competitive process. The sponsor then factors the allocation (sells it for cash) to an investor (probably a large tax-paying financial institution) and uses that cash as soft equity gap funding to develop or regenerate the property.

Once the property is fully developed and placed in service, the allocator issues a HART Credit credit chit that the investor attaches to its tax return. The HART Credit is thus a pound-for-pound reduction in taxes payable.

Uses market competition and market forces

HART Credits are pay-for-performance, a significant benefit to government. Government transfers development risk to the private sector.
The private sector takes performance risk; thus market mechanisms will enforce sponsor accountability.
Clawback provisions ensure ongoing compliance and enforcement.

Comprehensive urban regeneration

Compatible with residential homeownership (including live-work and shared ownership), residential rental, and retail (ownership or rental).
Mixed-use development is enabled and encouraged.

Works in brownfields

Gap funding will help overcome cost penalties of working in brownfields.
Is congruent with higher-density, adaptive reuse solutions.
Can be focused exclusively on regeneration areas and works across the whole range of tenures (residential and retail).
Will catalyse neighbourhood change.
Will stimulate higher local values (captured later in rates).

Cost-effective, promotes additionality

It will close the financing gap in schemes that are otherwise not feasible.
Delivers ongoing affordability in schemes that otherwise would include such.
Required subsidy levels will taper off as markets improve.
Will lever other resources: in deprived areas, ±150%, in high-value areas, HART Credits will lever ±300% (and will buy affordability).

Beneficiaries of a successful HART Credit

Neighbourhoods. Stimulates revitalisation.
Local government. New resource, flexible new tool.
Central government. Urban regeneration task is intermediated. Risk is shifted to private sector. More rates intake when things improve.
Housing Corporation. Improved property and expanded affordability.
Sponsors. They can assemble capital more reliably.
Sub-market renters. Affordability expands, properties are improved.
Existing owners in impacted areas. They can reinvest, gain tax benefits.
Early-entrant buyers in impacted areas. Take early risk, gain upside.
Local economic stakeholders interested in the neighbourhood.
English Heritage. Historic properties improved.

Additional benefits to government

Levers up to 80% more private investment (and compatible with asset-based finance rather than entity-level finance).
Brings new participants into affordable housing and urban regeneration.
Geographically precise intervention in essentially brownfield areas.
Closely targeted to delivery of PSA targets (neighbourhood renewal strategy, balancing supply and demand, brownfield redevelopment).
Inexpensive for government to administer.
Efficient and effective compliance and enforcement.

Uses principles proven in US

The US has over 15 years' successful experience with tax credits for affordable housing (more than 1,000,000 apartments) and historic rehabilitation.

Complementary to housing grants

Does not replace grant but rather is complementary with grant.
Will eliminate restrictions inherent in housing grant regime.
Targets a broader range of recipients and larger-scale schemes.

Will be piloted before enactment

Under UK and EU law, one cannot pilot a tax. Instead the funding delivery will be simulated via a cash-payment proxy: a binding promissory note from the appropriate bodyof government.