Like most budgets, the 2012 version brought a mixture of good and bad news. The headline grabbing items regarding the tax treatment of high-end residential property have caused a sharp intake of breath across this segment of the market. The increase in the top band of SDLT from 5% to 7% for properties purchased for more than £2m is painful but not entirely unexpected and should be absorbed relatively quickly – albeit negotiations on transactions around the new threshold may become more protracted.
However, the stance taken on residential properties acquired via “non-natural persons” (i.e. companies and collective investment schemes like unit trusts, or partnerships which have a non-natural person as a member) is positively head spinning. Closing tax avoidance loopholes is clearly desirable, however why go overboard and more than double the higher rate of SDLT (15%) for properties acquired via corporate wrappers? It would be fairer simply to create a level playing field and apply the same tax rules applicable to a straightforward direct purchase.
In addition to the punitive SDLT rate, the Government also intends to make property held in corporate wrappers liable to CGT on disposal and an annual mansion tax on ownership from April 2013. The extension of CGT to gains on disposals by non-residents on direct property and shares or interests in property may deter long term holders (who will have accrued sizeable gains) from selling and affect market liquidity. Any retrospective annual charge on ownership could trigger a spate of sales in advance of its introduction depending on the rate which is applied – although if CGT is applied retrospectively then maybe not for long term owners.
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)? The introduction of a statutory definition of tax residence for individuals next year may prove a further blow to overseas investors.
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 of these measures. 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 financial years according to the Government’s own figures.
About Nick BarnesHead of Research – Chesterton Humberts
Nick has over 20 years experience within the property research arena, having worked for DTZ and Knight Frank before moving to Chesterton Humberts to head up the Research Department. His career has covered both the commercial and residential sectors in the UK and international markets and includes market research covering investor and occupier markets. He has additionally provided bespoke consultancy services for major investors, developers and lenders.
Nick is passionate about research, without which he believes it is not possible to take balanced decisions regarding any property transaction. It is his long term aim to try to help elevate residential property research up to the same standing as that of the commercial property sector.
Outside of work, Nick is equally passionate about sport and photography and is partial to the occasional glass of red wine!