As the Shadow Chancellor discovered yesterday, instant commenting on something as complicated as the Autumn Statement is a risky undertaking. At this stage we do not know a lot of the detail of the measures that are being proposed and advance notice of tax changes can produce uncertainty in the market and the financial sector. Indeed it is debatable whether the use of an Autumn Statement adds to the budget process or merely takes away from it. Press comment concentrates on a limited number of high profile issues (this year, tax credits took the honour) whereas it may be the fine print that potentially has a big effect.
This year’s fine print revolves around property and specifically the tax changes around buy to let residential property.
Buying Residential Property
The first of these is the change to SDLT on such properties. The statement says that from 1 April 2016, buyers of additional residential properties for more than £40,000 will pay a higher rate of Stamp Duty Land Tax. Essentially, the rates will be 3% above the current SDLT rates for residential property and will be:
Up to £40,000: 0%
£40,001 to £125,000: 3%.
£125,001 to £250,000: 5%.
£250,001 to £925,000: 8%.
£925,001 to £1.5 million: 13%.
Over £1.5 million: 15%.
At the moment the Government has said that the higher rates will not apply to purchases of caravans, mobile homes or houseboats, or to corporates or funds making significant investments in residential property given the role of this investment in supporting the government’s housing agenda. Having said this, the Government has said it will consult on the policy detail, including on whether that exemption for corporates and funds owning more than 15 residential properties is appropriate.
It is really difficult to see how this will all work out in practice. Purchasers of additional residential properties will have to declare that the property will not be their primary residence. Presumably we can assume a new question on the SDLT return to deal with this. But, of course, not all purchases of second or more properties are by individuals. Developers will often have a number of houses that they have bought with the aim of getting planning consent and then redeveloping but nowhere near 15. Will they be able to avoid having to declare that the property will not be their primary residence?
The government says it will use £60 million of the additional tax collected (note, barely 6% of the £1 billion that will be raised) to provide for communities in England where the impact of second homes is particularly acute. Comment so far seems to be that it will be used to fund the widened Help to Buy scheme in London which will see buyers who can find a 5% deposit given an interest free loan worth up to 40% of the property.
While recognising that there are areas where the proliferation of second homes is causing problems, there are others where the availability of property for rent is actually crucial to the local economy and it is difficult to see why these should be sacrificed for the benefit of Londoners.
Disposing of Residential Property
The second change relates to the disposal of properties and the application of the Capital Gains Tax rules. From April 2019, sellers of properties subject to CGT will have to pay it within 30 days of selling a property, rather than waiting till the end of the tax year. This is potentially a difficulty as attempting to pull all the finance information together to make an accurate return within that time scale is going to be very tight.
This change is in addition to the already announced changes which mean that Landlords will get a lower rate of tax relief – 20% – on mortgage payments and it is difficult to disagree with the comments of Richard Lambert, chief executive of the National Landlords Association, that “The chancellor’s political intention is crystal clear; he wants to choke off future investment in private properties to rent.”
Since the effect of the Help to Buy scheme will almost inevitably be to increase demand and push house prices up still further, restricting the supply of rental properties seems somewhat short-sighted. This government seems to have a dogmatic problem with private individuals investing in rented residential property even though it seems unwilling to make that investment itself. To the extent that it acknowledges the need for a rented sector, it wants to rely on big providers such as housing associations but even here it is trying to impose its preferred solution of right to buy. Sadly a one-size fits all solution is rarely appropriate and the biggest brake on ever increasing house prices could easily be a thriving rental sector coupled with a move away from the home-ownership is best mantra of recent times. And if the government’s intention is to destroy the rented sector, it would be rather helpful for them to say so.
Effect on the Market
The last time a Chancellor of the Exchequer made a major property tax change of this nature and gave 6 months’ notice of his intention to do so (the abolition of double mortgage tax relief in 1988), the effect was a short term surge in demand and house prices followed by a catastrophic collapse that took until the mid-90s to recover from. It is to be hoped that this can be avoided this time but it is difficult to see how bearing in mind that the advice must be the same, namely, if you want to invest in residential property, make sure you do so by 1 April 2016 unless you want to give the chancellor an extra 3% of the purchase price.