If the real issue is the contribution made by owners of high value property to central (rather than local) government taxation, then it is important to understand the current situation.
Our analysis shows high value property already makes a disproportionate contribution to receipts from both stamp duty land tax (the primary transactional tax) and inheritance tax (the primary wealth tax).
It is therefore important that any further changes don't damage the value of this 'rich seam' of tax take. Market impacts have to be carefully considered.
Stamp Duty Land Tax
In 2010 properties worth over £1 million accounted for just 1.6% of recorded sales but 26% of residential stamp duty land tax receipts – some £1.2 billion.
Since then a new 5% rate for properties sold for in excess of £1 million and 7% for those for over £2 million have been introduced. Applied to the deals recorded in 2010 this new level of taxation would have accounted for 34% of the Stamp Duty Land Tax (SDLT) take, or £1.85 billion.
Increased rates of tax inevitably give rise to greater incentive to avoid that tax, which in turn requires the introduction of targeted avoidance measures, though the nature of recent SDLT avoidance measures has caused concern among both the property industry and wealth managers.
The SDLT charging structure has paid dividends for the Treasury in the post credit crunch environment.
The top end of the housing market has been much more buoyant than the mainstream, given an influx of overseas wealth and a much lower reliance on mortgage finance amongst domestic buyers. That has prevented a significant drop off in stamp duty receipts, despite the fact that transaction levels across the market continue to run at about 55% of the pre crunch norm.
For this reason, calls for a flat rate of stamp duty are unlikely to be considered expedient. However, the debate over a move away from a slab structure to a banded structure is likely to rumble on, given that it is less likely to create artificial thresholds in the market.
Inheritance Tax
Inheritance tax receipts from high value property are far lower than those from stamp duty. HMRC figures suggest that 1,456 estates with total assets exceeding £2 million were subject to inheritance tax in 2008/09. Of these 1,173 (81%) comprised residential property with an average value of £1.13 million, generating, we estimate, a tax take of £831 million.
This means just 0.7% of the housing stock held at death generated 36% of the inheritance tax receipts from residential property. In most circumstances taxpayers’ nil rate bands cover the value of residential property held at death and no inheritance is applicable.
Consultation on the taxation of property held by ‘non-natural persons’ suggests that inheritance tax receipts from high value properties will rise in the future, as more property currently held within offshore corporate structures is brought into personal ownership and therefore within the inheritance tax net.
Future Tax Policy
Our analysis suggests that, taken as a whole, high value property makes a disproportionate contribution to the tax take from residential property.
There are inequalities that result from the way council tax is charged, but these are offset by the distribution of central government taxes in the form of stamp duty and inheritance tax.
If the inequalities of council tax are to be removed, then it would be necessary to have a geographically uniform charge for each council tax band. But this would fly in the face of local accountability for the cost of local government. In the case of central government taxation, put simply there are three ways to increase the tax take from high end property: 1. Minimising tax avoidance 2. Increasing tax rates 3. Introducing new taxes.
Tax Avoidance
In addition to increased anti-avoidance provisions that are specific to the tax in question, new taxes have (in some cases) been introduced to plug the gaps left by tax legislation. These have generally been retroactive in their effect i.e. by introducing new tax liabilities on those who have previously undertaken tax-planning measures.
For example, the pre-owned assets tax introduced in 2005, created an annual levy on those who had used certain schemes to avoid inheritance tax on their death. There are parallels with the latest proposals for an annual levy where an individual has previously established a company “to envelope a property owned for the personal use of that individual or their family… where tax avoidance is a significant factor”.
As has been highlighted by commentators during the ongoing consultation, the wisdom and fairness of such retroactive legislation needs to be carefully considered. In the words of the Institute of Chartered Accountants of England and Wales the fiscal impact of such measures needs to be balanced against the potential that they are considered to “damage to the perceptions of the UK tax systems as fair, proportionate and stable”.
It is clear where such anti-avoidance measures are introduced account needs to be taken of the consequences in the context of the broader tax regime.
For example, the recent annual charge consultation has highlighted that the adoption of offshore corporate ownership vehicles by non-doms has had more to do with inheritance tax planning than stamp duty avoidance.
Where property is forced out of the so-called ‘corporate envelope and into personal ownership by non-doms it becomes liable to inheritance tax. Whatever the political desirability of achieving this, it will undoubtedly impact the relative attractiveness of owning prime properties in the UK to overseas buyers, even those resident here. We are already seeing buyers and owners delaying their transactions until they know the outcome of the ongoing consultation.
This suggests that further changes to the tax burden borne by high value housing could adversely impact on the market, with consequences not just for prices but also the central London development sector, which is one of the few buoyant parts of the UK house building industry.
Most importantly, our analysis suggests that tax avoidance is not nearly as widespread as is believed and that most corporate structures are bona fide and set up for business purposes.
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