This is the first in a series of guest posts by our external advisers and industry experts on pertinent matters for property and finance. In this post CCW’s experts talk about HM Government’s approach to the increasing property taxes.
Property (and in particular residential property) has been the subject of much attention from the Government in recent years.
Property Taxes Recently Changes
- The introduction of the Annual Tax on Enveloped Dwellings (ATED) which is payable by non-natural persons (mainly companies) that own UK residential property. The value of properties caught by ATED has reduced drastically from £2m to £500,000 since the introduction of the tax and the annual tax charge now exceeds £200,000 per annum for properties worth more than £20m.
- The introduction of ATED related Capital Gains Tax (CGT) charge on disposals of residential property.
- The introduction of a CGT charge for non-resident individuals and non-resident close companies disposing of residential property.
- The exclusion of residential property from the general reductions in the property tax rates of CGT, meaning that the higher rates will continue to apply to residential property.
- Increases in the rates of Stamp Duty Land Tax (SDLT) payable on the acquisition of residential property. SDLT is now payable at a rate of 12% on property values above £1.5m.
- The introduction of a 3% SDLT surcharge on the purchase by an individual or partnership of a second, or subsequent, residential property. SDLT is now payable at the tax rate of 15% on additional residential properties on the value above £1.5m.
- Limitations on the amount of tax relief for financing costs incurred by both incorporated and unincorporated property businesses.
Many of the original changes appear to have been motivated by political objectives, particularly targeting those who acquired properties in companies. So that a subsequent sale of the shares in the company only attracted Stamp Duty at 0.5% instead of the higher property tax rates of SDLT on a disposal of the property itself.
However, much of the subsequent changes (particularly those involving SDLT and capital gains tax) appear to have been driven by the general need to raise taxes to reduce the Treasury deficit. This is also allied with a desire to take the heat out of an ever increasing residential housing price bubble.
Property appears to have been seen as an easy target for raising taxes. However, the evidence appears to suggest that the amount of tax generated by these changes is not that material.
What is disappointing to note is that all of the changes introduced in recent years appear to be piecemeal reactions to the political mood that do not form part of a coherent plan. As such, the changes have potentially harmed the attractiveness of investment into the residential property sector, suppressing the appetite for investment, prompting some investors to withdraw from the sector completely, distorting the residential sector in comparison to the commercial sector and creating uncertainty for existing and potential investors, whilst at the same time failing to materially increase real estate tax revenues.
Further, there is a lack of effective measures to increase the supply of residential property, particularly in the South East, to go some way towards rebalancing the supply of residential accommodation. We would welcome a period of clear policy vision and some worthwhile initiatives from the Government in this regard.
Comment by Nikolay Petkov, Principal Avamore Capital: We would like to thank CCW for their fascinating input on the Government’s approach to property taxation. The Avamore view is that property is now sufficiently taxed and there is clearly no benefit to the Treasury to tax property further, nor no benefit to the market. The impact of increased stamp duty on high value properties in November 2014 had a significant impact in cooling the top end of the Prime Central London property market. This prevented better value parts of London becoming even more over-priced.
The recent 3% stamp duty on second homes will provide owner-occupiers with a little additional purchasing power relative to a buy-to-let investor but ultimately. As BTL investors adjust to the new reality of the stamp duty system, they will simply absorb the additional cost in the short term and pass the extra costs onto renters.
Clearly the Government’s desire is to see increased home ownership. However, our view is that to achieve this effectively, increasing the property taxes is not the answer, but in fact increasing supply is. Reform of the planning system and an end to NIMBYism is paramount to get Britain building more homes each year and in turn ensuring there are enough homes for people to buy and rent.
In addition, the institutional PRS sector has been courted by the Government for years to deliver increased supply of good quality housing into the rental market. The additional property taxes are a kick in the teeth for PRS operators and may deter much needed investment into the sector, just as it was getting started.
Notes to Editors:
- Crowe Clark Whitehill is a national audit, tax and advisory firm and the UK member of Crowe Horwath International, one of the largest global professional service organisations with 171 independent member firms operating from over 700 offices around the world.
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Guest Post By Crowe Clarke Whitehill.
For more information visit : www.croweclarkwhitehill.co.uk