By Ben Simmons
Phil Nicklin, real estate tax partner at Deloitte, considers what property tax measures the Chancellor is expected to focus on in the Budget on 21 March.
Following a particularly tough 2011, when growth was hampered by sharp rises in commodity prices and events in the Eurozone, Chancellor George Osborne faces a challenging environment for Budget 2012. Property is not expected by any means to be the focus of the Budget, but there are some interesting announcements the industry should look out for.
So, what could the Chancellor announce?
in the last Budget, the Government took great strides to make the REIT regime more flexible and attractive. These proposals, which should come into effect this July, include abolition of the 2% entry charge, relaxation of the diverse ownership rule for institutional investors and introduction of a 3 year grace period for REIT start-ups. There are still a number radical changes that could be made which would substantially increase the attractiveness of the REIT regime and could have significant socio-economic benefits.
The Government has been considering proposals to introduce mortgage REITs and social housing REITs, some of which we could see in next week’s Budget:
These are well developed in the US and, if introduced in the UK, could take on existing bank loans, freeing up lending capacity and potentially providing a new source of capital to the mortgage market.
Social housing REITs
These are needed as a platform to raise new capital, as Government grant funding is drying up and long term debt funding is becoming increasingly difficult and expensive to obtain. Unless changes are made, social housing REITs would face many of the difficulties encountered by residential REITs, such as the need to ‘churn’ property (a ‘bad’ activity for REITs) and problems meeting the interest cover ratio because of low net rental yield. The question of whether grant funding would need to be repaid on a transfer of housing association stock to a REIT would also need to be addressed.
The Government could and should make changes to allow REITs to hold shares in other REITs tax efficiently.
Commercially, this would greatly improve the flexibility and attractiveness of the REIT regime, enabling REITs to form new REITs into which they could attract a diverse range of capital.
Stamp duty land tax (SDLT)
George Osborne and David Gauke have both commented on wealthy property owners buying and selling properties without paying SDLT and have promised to clamp down on the perceived avoidance as a “top priority”, although it is unclear just how extensive avoidance really is. HMRC has now significantly stepped up its compliance work, but it is still possible to avoid SDLT on future sales by buying a property into a company. . The only practical way to aid enforcement would be to impose a reporting duty on estate agents. It is expected that the Government will introduce some form of stamp duty charge on the transfer of land rich companies holding UK residential property in the upcoming Budget. Similar legislation exists in France and Germany. At this stage, there is no suggestion that the charge will be extended to the commercial sector.
Residential property tax
There have been suggestions that from different quarters that higher tax on residential property could be charged. The UK has about 27 million homes, but only 154,000 fall into the top band for council tax, with a further 920,000 in the next band. The introduction of an uncapped annual levy on houses worth over £2m (‘mansion tax’) has been suggested as a way of taxing the ‘super-rich’, but there is insufficient correlation between an owner’s income and the capital value of property.
However, what we might see is an increase in council tax charged in the top two bands. A house in the top band is worth at least £1.2 million in London (where one third are located) and at least £700,000 throughout England. The top band house in Scotland is worth at least £550,000, but just £420,000 in Wales. Even if an increase were to be spread over both the top two bands, it would be unlikely to raise more than £1 billion. This could cover just over one million homes, compared to the four million people liable to higher or additional rate tax.
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