The American dream

San Francisco is more associated with the penthouses of internet millionaires and pop icons than social housing. Average rents are among the highest in the USA at more than $2000 (£1250) a month. As a result, the construction of affordable housing almost ground to a halt recently as the low rents could never cover the cost of development.

So how did Villa Nueva, a 63-apartment block for single mothers that offers rents at half the market rate, get built? The answer was an innovative tax credit, one that could now be about to make its UK debut.

Next week, regeneration expert Andrea Titterington, formerly chief executive of Maritime Housing Association in Liverpool, will unveil her plan for a UK housing and regeneration tax credit at the National Housing Federation annual conference. She will tell delegates about the system and ask if there is support for a pilot here. "It seems important to look to other countries and see if what they do is adaptable," she says.

Under the scheme, every pound spent by developers on regeneration projects would be knocked off their corporate tax bill, up to a set limit. The system would give developers tax reductions for working on particular social housing or regeneration schemes.

The Inland Revenue would allocate tax credits to the regional development agency or English Partnerships, the regeneration quango, which would pass them on to developers working on approved projects. The developers can either sell the credit to an investor or hold on to them.

Once the scheme is built, the developer or investor – whoever now holds the credits – can attach them to their company tax bill and get a reduction.

The US scheme has been running since 1987. It has injected more than $3bn a year into social housing and built 1 million homes. It came about after the US Congress forced banks to help their local communities. Titterington came across the idea at an American conference and was so enthused that she brought it home.

Last year she got together a group of civil servants, housing experts and bankers to discuss the scheme. After the seminar, she and fellow enthusiasts from banks and universities in the USA locked themselves in a hotel to hammer out a British version. She hopes it will be used for regeneration areas, upgrades to homes, revitalisation of historic buildings and development in high-cost areas.

Attractive to private developers
At a time when housing associations are strapped for grant, a extra source of money looks very tempting. "The main advantage is getting private investors into areas where they otherwise wouldn't invest," says Titterington. It could get more private investors into social housing, something that should push all the right government buttons. The scheme might also feel less expensive than grants: "This isn't money foregone, like grant, just money the government doesn't receive in tax," she says.

The RDA would pass on the credit to a developer, who can either sell it to an investor or hold on to it to get a tax bill reduction

Another attraction is that the developer takes on the risk of the development because it can only cash the credits once the project is successfully completed. "In the USA the rate of non-compliance is very low," says Titterington. She points out that the firms involved would be large taxpayers so if they tried to cash in on a failed scheme, the Inland Revenue have their details and could investigate.

The administrative costs of the scheme would be low because it uses the existing tax system and it's certainly less complicated to get funding from one set of tax credits than lots of different grant funders with different timetables. These advantages have made the credits popular with US developers. "Some states are more than four times over subscribed with schemes," says Titterington.

The credits can also be cheaper than gap funding, says Ben Denton, a director of finance consultant Abros, who is researching the potential for the credits in the UK. "Gap funding costs about £10,000 a unit whereas this would cost the public about £8000."

Trading places
There's plenty of enthusiasm for the system, but can it work? The signs are good: insiders say the Treasury is interested and may look at it as part of the Barker review of housing supply. The ODPM is said to be "anything from quite to very supportive".

For the scheme to be a success, it would require something of sea-change in approaches to tax. Companies need to be able to sell the credits to investors so a market in them is created and their value to developers increases, so developers would be prepared to take on projects for less. Housing associations that are tax exempt could sell them to companies that can use them. If the scheme centred on small areas, such as market renewal, it would be even harder to develop a competitive market and economies of scale.

Christine Whitehead, professor of housing economics at the London School of Economics, says the US system "was a new kind of market and took a lot longer to get going than people suggest". The Treasury has not used tradeable tax credits before and could be wary of introducing them but, as Titterington points out, tax credits for families only came into being in April.

Running the scheme would also need a change in how we think about funding for social housing, says Whitehead. UK schemes have usually been financed through debt – bank borrowing and grant paid up front – rather than an equity system like tax credits. Her main concern is that the credits could replace grant. "This is an alternative approach to section 106 or social housing grant but we don't want to lose them. The existing system works quite well and there's no evidence we would get much more money out of [tax credits]."

Titterington is adamant that tax credits should supplement rather than replace grant and planning gain but whether that happens will be up to the government. It's possible to mix the best of the grant system with the best of the tax credit concept by giving some grant upfront and a further payment if the scheme is successful, says Whitehead. That way, the private sector still takes some of the risk and the current grant mechanism remains in place.

But would the scheme really work for the high-risk, difficult projects it is designed to help? Whitehead says: "Developers can pick and choose projects, so they can take the lower-risk projects." The involvement of regional development agencies should help more difficult projects to get off the ground. "The RDA would ask developers to come to them with schemes that met their objectives," says Titterington. "It's up to the RDA to decide if a scheme meets their ends and if it doesn't, it won't get tax credits."

The only real way to find out whether tax credits work is to pilot them and that is exactly what Titterington hopes to do. She wants to do the test in Anfield, part of the Merseyside market renewal pathfinder. "You can't pilot a tax so we are going to have to use grant as if it were a tax credit," she says.The next step is to apply to English Partnerships for gap funding to use in place of the tax credit and then the pilot can begin. Companies would get some of the gap funding money once the development was successfully completed, instead of a tax reduction.