We were expecting some painful pronouncements regarding residential property at this year’s budget as the Chancellor had warned us about his intention to come down hard on tax avoidance and to reform the tax system to ensure that “the tax revenues we get from the wealthiest increase”. However, the severity of the measures aimed at the top end of the market induced a sharp intake of breath among most observers.
An increase in the top rate of Stamp Duty Land Tax (applicable from 22 March 2012) was always on the cards, although the jump from 5% to 7% for properties with a sale value of more than £2m was harsh, equating to an increase of 40%. Moreover, we understand that the new rate applies to single or linked purchases of up to five residential properties by individuals or companies, where the aggregate price paid exceeds £2 million.
Even more alarming was the sledgehammer applied to the use of “non-natural persons” (i.e. companies and collective investment schemes such as unit trusts, or partnerships which have a non-natural person as a member) to acquire residential property. Properties purchased for more than £2 million through these vehicles are now subject to a new 15% Stamp Duty, with exclusions for property developers and corporate trustees in certain circumstances.
As if this wasn’t drastic enough, the Chancellor additionally intends, following consultation, to apply an annual ownership levy on residential properties held within these corporate wrappers and to charge Capital Gains Tax on the disposal of properties, including shares or interests in residential property, from April 2013. It is worth noting that these new rules apply both to offshore and UK entities.
Closing tax loopholes is clearly desirable, however would it not be more prudent and fair simply to create a level playing field and apply the same tax rules for acquisition via an SPV as those applicable to a straightforward direct purchase? One of the attractions of the UK for inward investors is a low tax regime.
By hammering, rather than aligning, the route used by many overseas buyers are we not at risk of, if not killing, then at least badly wounding a Golden Goose, bearing in mind overseas buyers have been propping up the prime London market since the recession? Moreover, use of this type of structure to acquire residential property is often to do with preserving the anonymity of the buyer rather than simply a means of reducing or avoiding tax.
It is debatable whether the full implications of these measures have been thought through. The fact that the Government is seeking consultation on the introduction of CGT and the annual ownership tax may offer hope for at least some mitigation. It would be nice to think that the property industry could lobby Government successfully to re-think its approach – especially since the estimated increase in tax revenue from the SDLT and CGT avoidance measures is only £65m per annum over the next three tax years according to the Government’s own figures.
Aside from the tax assault on the higher end of the market, the Budget confirmed various measures aimed at stimulating the wider housing sector, including the NewBuy scheme which makes mortgages available at a 95% LTV for new home purchase and a reinvigorated Right-To-Buy initiative for two million tenants in council housing.
As important are the moves to simplify and speed up the planning process to assist housing development announced in the new National Planning Policy Framework (NPPF). The Government is also accelerating the release of public sector land, sufficient to build over 100,000 homes by April 2014. Further support for housing development will come from the £570m Get Britain Building Fund aimed at supporting construction firms in need of development finance.
For investors, arguably the most significant moves are with regard to legislation changes to support entry to and investment in REITs, including the abolition of the 2% levy for property companies wishing to convert to REIT status. However, more needs to be done if the institutions are to be tempted back to the residential sector en masse and provide a much needed injection of fresh capital.
It is still too early to say what the longer term impact of the 2012 Budget changes will be on the residential property market. Many purchasers and owners will doubtless be instructing their tax advisors to come up with new tax planning strategies while some prospective foreign buyers may have second thoughts about the UK. It is likely that properties around the £2m level will be subject to more negotiation than before and valuations at this price level will also be under closer scrutiny.
Perhaps because of its high profile, luxury residential property does seem to have been singled out in the Government’s drive to maximise tax revenue and clamp down on tax avoidance. However, it is interesting to note that, of the HMRC estimated £35bn tax gap in the UK in 2009/10, only around 14% was accounted for by tax avoidance and it is to be hoped that the cure will not prove more harmful than the illness.