London property has always been a major source of government tax revenue contributing disproportionately to receipts of Stamp Duty Land Tax (SDLT), Capital gains Tax (CGT)) and Inheritance Tax (IHT) - with it often being suggested that IHT especially has become a tax only payable by those living in London.
Governments have clearly viewed London Property as an easy way to raise taxes with a minimum of political fall-out. Recent years particularly has seen numerous changes to the taxation of property as the government has sought to impose an ever-increasing tax burden. The tax raised through London property means that the health of the London property market has huge implications for a government still publicly aiming to ‘balance the books’. Has the combined impact of recent tax changes gone too far?
It is hard to refute that recent months has seen a slow down in the London residential property market. An analysis by KPMG shows that in the 15 months after April 16 London property
transactions were actually down by 12% compared to the 15 months prior and the Financial times reported on the 31 January 2018 that London property transactions were down 20% over a four year period. The fall in transactions clearly has a knock on impact on prices with CNBC reporting that prices actually fell in 2017 while the Independent predicted in December that London prices would fall further in 2018.
What though is causing this slowdown? Is it uncertainty over Brexit or something else? Some commentators such as Jeremy McGivern of Mercury Homesearch remains optimistic about the prospects of the London property Market describing the recent slow down as a ‘correction’ while sellers and estate agents get accustomed to more sensible pricing. Jeremy remains optimistic about the future and discounts the long-term impact of Brexit pointing for instance that it is simply not practical for bankers to leave the UK ‘en masse’ since no other city could provide the International Schooling required for their children.
Of course it is definitely the case that any hesitancy by potential International investors caused by Brexit has at least partly been offset by the associated fall in the value of Sterling. If Brexit is not the cause of the slowdown could it, however, be the many tax changes which the government has introduced? Since 2012 almost every year has seen a significant tightening of the tax rules on residential property with some of the most notable changes listed below;
The government’s own statistics for 2016/17 show that while overall SDLT receipts rose nationally (as a result of higher tax rates) they actually fell in London both in real terms (down 5%) and as a percentage of the total (down from 46% to 39.7%). It is entirely possible that the government is relaxed about London specific tax revenues, provided increased revenues elsewhere provide an offset. The impact of all the above tax increases will, however, take time to be felt and some of the changes were only recently introduced. Given the huge contribution made by London there is a definite danger that if the tax changes lead to long term changes in behaviour the overall revenues might fall too.
It is clear that as a ‘Global City’ London is in direct competitive with other major international locations and if the government is not careful London risks losing out to investment elsewhere - some commentators are for instance suggesting that Paris’ residential market might even overtake London in 2018 .
When introducing these tax rules the government does not appear to have taken any regard to how the tax changes might hurt London’s competitiveness. By not first evaluating the long-term impact they risk placing themselves in a bind since relaxing the rules later will likely be politically impractical if ‘rich foreigners’ are seen to benefit.
Let us review some of the above changes and compare to one of London’s major competitors, namely New York.
The first thing to note is that New York does not have any tax remotely similar to the UK SDLT. New York does, however, tax non- residents on capital gains with the combined Federal and State tax rate being very similar to the tax rate in the UK- I’m certain that the fact that other jurisdictions like NY impose such taxes on non-residents was strongly influential in the government introducing the nonresident capital gains tax in April 2015.
London, however, appears to be the only global city where residential property is subject to both a significant tax on purchase (SDLT) and a significant tax on disposal (NRCGT), when combined London residential property definitely appears to be uncompetitive by comparison. This will be exacerbated by the changes introduced from April 17 designed to stop non-domiciled individuals from using offshore structures to shelter residential property from IHT. Although one can understand the political reasons behind these changes no regard appears to have been taken to the fact that nonresidents investing in places like New York routinely use similar structures to avoid Federal and New York Estate taxes. The difficulty to now plan for death means that London, which was already unattractive due to the combination of both high SDLT and high capital gains tax, will definitely lose out on potential investment from individuals concerned about their own mortality.
It should be noted that when the new IHT rules for properties held in offshore structures were announced many clients found it unjust that there was no relief available to unwind their existing arrangements. The changes introduced in 2012 and 2013 (and the associated commentary) strongly implied that the government was happy for offshore companies to be used for IHT planning purposes in return for the investor paying both higher taxes to enter into the arrangement and an ongoing tax for participating. By providing no relief to unwind existing structures and no ‘grandfathering’ many investors are left feeling that the government simply cannot be trusted and thus will likely be deterred from re-investing in the future.
In addition, it is still very common in many other jurisdictions to use companies to own residential property both to help preserve anonymity, and also provide liability protection should someone be hurt on the premises. Unlike the UK where using a corporate structure is penalised an investor in New York, for instance, can purchase property using a Limited Liability Corporation without impact on their taxes. Again, this is an example where London seems unattractive.
Given that London is in competition with other cities it seems odd that the government would keep pressing ahead with new tax rules before evaluating the long-term impact of the rules it has already introduced. One cannot help but feel that the government simply views London residential property as a cash cow to be milked but if not careful there is a danger that they could ‘strangle the Golden Goose’. Worryingly the government announced on 22 November 2017 a consultation on applying some of the above changes to commercial property as well. As any tax advisor knows the announcement of ‘a consultation’ means that the government is determined to press ahead regardless of the feedback!
Given the continued uncertainty over Brexit and the fact that the long-term impact of the above tax changes on residential property have yet to be evaluated I would strongly urge caution. So far, the London property market has held up better than I would have expected and although some commentators such as Jeremy McGivern remain bullish I would urge the government to please pause before introducing any new tax changes so that we can properly evaluate the long-term impact of those changes already introduced. I am not optimistic that the government will take note of my views.
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