Right to Buy receipts: the new acquisition cap
Following the Government's 2018 consultation on the use of Right to Buy (RTB) receipts, the rules for local authorities on spending retained additional receipts changed last year. Most of these changes came into effect on 1 April 2021 and are covered by our previous article on the new rules. To recap, the changes which have already been introduced include:
- Increasing the time limit for use of the receipts from three to five years – this covers not just future receipts but existing ones (i.e. back to 2017-18).
- Requiring yearly rather than quarterly pooling returns and payments to the Secretary of State – this adds to the benefit of the extra two years by removing the complexity of four rolling deadlines each year. The Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2021 (which came into force on 30 June 2021) changed the period by reference to which a poolable amount is calculated from a quarter to a financial year.
- Increasing the cap on the cost of a replacement home that can be met from RTB receipts from 30% to 40% – this covers social and affordable rent homes "across the board", i.e. for existing and future receipts, for all eligible tenures (see below) and throughout England.
- Allowing RTB receipts to be used to deliver shared ownership homes and First Homes – this applies the new 40% cap to these tenures as well as social and affordable rent, although there is no obligation on authorities to extend the use of receipts like this.
To retain their additional receipts, local authorities must enter into an agreement with the Secretary of State allowing them to use, subject to certain restrictions, their RTB receipts to provide social housing (the RTB Retention Agreement). The updated RTB Retention Agreement which incorporates the new rules came into effect on 1 April 2021.
The Department for Levelling Up, Housing and Communities (DLUHC) also published new guidance 'Retained Right to Buy receipts and their use for replacement supply' (the Guidance) on 8 July 2021. This replaces all existing guidance on the use of RTB receipts.
The acquisition cap
Although most of the changes came into effect on 1 April 2021, the "acquisition cap" will be introduced from 1 April 2022. This is a new cap on the proportion of retained RTB receipts that local authorities can use for acquisitions (as opposed to development).
The Government's policy objective behind the cap is to ensure that RTB receipts are being used to contribute to overall supply as much as possible. In its consultation response published last year, the Government stated that the original decision to allow local authorities to use RTB receipts for acquisitions was based on the expectation that "this freedom would be used sparingly". However, in reality, acquisitions made up around 48% of RTB replacement homes.
Therefore, in the financial year 2022-2023, no more than 50% of dwellings delivered using retained RTB receipts can be delivered as acquisitions. This is calculated based on the total number of homes delivered. The 50% threshold will reduce progressively over the following years as set out below, until the 2024/25 financial year when it stabilises at 30%:
2021-2022 No cap
2022-2023 50% cap
2023-2024 40% cap
2024-2025 onwards 30% cap
The first 20 units delivered each year are excluded from the cap and this applies to all local authorities.
DLUHC has said that the purpose of the phased approach is to give local authorities time to prepare for the introduction of the cap and "ramp up their building programmes." However, from 2025/26 onwards, local authorities will be able to use retained RTB receipts for acquisitions in the following way – 20 freestanding acquisitions plus 30% of the total number of units 'delivered'.
Some types of acquisitions will be exempt from the cap, including acquisitions from an authority's own housing company or ALMO and regeneration projects that contribute to net supply. However, acquisitions of new build from private developers will not be exempt.
There is no actual definition of what counts as an "acquisition" and what counts as "development" in the updated RTB Retention Agreement and Guidance, so this will need to be considered on a case by case basis in terms of assessing how retained RTB receipts will be deployed.
Local authorities can of course continue to acquire properties above the cap, but any such acquisitions cannot be funded using RTB receipts.
Whilst many respondents to the Government's consultation disagreed with the introduction of the cap on the basis that acquisitions can provide speed and flexibility to meet local housing needs, the Government's motivation for introducing these changes appears clear: it is directing local authorities towards developing themselves or with partners to bring genuine additionality to the sector.
Whilst restrictive, the RTB Retention Agreement does allow local authorities to use RTB receipts in a variety of ways to deliver additionality, often through working with not for profit registered provider and other third party partners. The introduction of the acquisition cap makes partnership working to develop new homes even more crucial for local authorities wishing to spend their RTB receipts.
We have advised many local authorities, housing associations and other third parties on the different types of models that can be used to deliver new housing in accordance with the RTB Retention Agreement. Local authorities do not want to be in a position where they have to hand over retained RTB receipts to the Government. Changing the period of spend from three to five years will certainly help, though explicitly limiting the spend on acquisitions will mean that some local authorities will need to change their delivery approach.