By Naomi Heaton, CEO of London Central Portfolio
The year has not gone off with a bang for the Conservatives. Following the recent loss of the UK’s AAA credit rating and having been placed third in the Eastleigh by-election, they have come under the microscope again.
Now with just days to go until the 2013 Budget and the OBR castigating them for their lack of pro-growth measures, it is time for the Government to do something positive.
Last year the Government made some fundamental changes to the UK tax laws. As a way of ensuring the wealthy pay ‘their fair share’ of tax (however this is quantified), they increased Stamp Duty from 5 to 7% for properties over £2 million.
This had an immediate effect of reducing transactions by 30%, which completely wiped out the Exchequer’s predicted £150m tax windfall. By Q4 however, transactions had bounced back again, resulting in a small increase of Stamp Duty tax take at £25m. So overall, a populist vote winner with a small economic benefit, which any smart Government would trumpet.
They also made an unexpected move. The Government penalised owner-occupiers who buy properties worth over £2 million through company structures, which they perceived as a form of tax avoidance. Stamp Duty was increased to 15% and an annual residential property tax (ARPT) will be introduced from April 6th of between £15,000 and £140,000.
As the electorate generally believes that it is very rich tax evaders who use special vehicles to buy property, the Government should also announce this success with a fanfare at the forthcoming Budget. Hopefully their speech-writers are on their mettle...
So, what will the Chancellor do with property taxes in the 2013 Budget?
The Conservative Chairman alluded to further Stamp Duty rises this Budget in a recent press notice. Grant Shapps said: “We are also clear that the broadest shoulders should bear the greatest burden which is why this Government has increased tax on the richest in every Budget, through higher Stamp Duty on expensive properties”.
It would be another easy, populist move to further increase Stamp Duty on properties between £1 and £2 million from 5% to 6%. Properties over £1 million were last hit two years ago, when Stamp Duty was increased from 4% to 5%.
However, if this hike resulted in a dramatic drop in transactions, like the one seen following the 2012 Stamp Duty increases, it is estimated that the Exchequer would lose £89 million of tax revenue over the year. Not only this, but it will further impact on the Tory heartland whilst striking fear into those in lower price brackets.
The Exchequer could also look at another raid on the foreign investor, however this would make no economic sense. The ever weakening sterling provides ‘Brand London’ with a unique competitive edge, attracting even more inward investment. Foreigners investing in the vital private rented sector in Prime London Central (PLC) contribute a staggering £1.2bn per annum to the economy supporting a huge array of professions, services and trades across the UK. They further contribute to the £10bn spent on the retail trade, education, the night time economy and tourism.
Promoting foreign investment will raise vital tax revenues without imposing upon austerity-weary Brits.Trying to drum out a few wealthy foreigners in central London, occupying just 13 square miles, may have popular appeal but it is not going to deal with the housing crisis. Using them as a scapegoat is a clever distraction, not a clever solution.
However, there is something a smart Government could do. Something which would give a huge number of people a tax break, whilst stimulating the housing market and the general economy.
The Chancellor should re-evaluate the 1% Stamp Duty ceiling at £250,000. This has remained unchanged for over 15 years whilst the average price of a house has increased three fold from £79,242 to £238,293, almost reaching this pivotal barrier.
For around 10% of the market, SDLT could jump up from 1% to 3% in 2013, a massive increase from £2,500 to £7,500. There is clear evidence that the Stamp Duty threshold has already suppressed normal price growth, with almost three times as many transactions taking place between £200,000 and £250,000 than between £250,000 and £300,000 (33,733 vs 13,774 in Q4 2012).
Should the band not be reassessed, there are two possible consequences. Firstly, an even larger bunching will occur at £250,000, which will prohibit the fragile recovery of the market and continue to depress house prices, which only grew by 2.3% last year. Secondly, home owners will choose not to ‘trade up’. Another obstacle for first time buyers, trying to get onto the housing ladder.
If Osborne were to move the 1% ceiling to £300,000, the opposite would occur. Average property prices would push through, finally bursting through the artificial ceiling at £250,000, augmenting the property market recovery and boosting general morale.
In moving the threshold, the Government would unlock this market and increase transactions. If the number of sales got back to pre-credit crunch levels, which were a staggering 88% higher than now, the 1% Stamp Duty take (instead of 3%) on these sales, would more than balance the Exchequer’s books.
Re-evaluating the threshold will not only promote fairness but would work in the favour of 30% of the population, who could potentially purchase at this level. A major vote winner for the Conservatives. Moreover, with houses representing most people’s primary asset, rising prices will inevitably stimulating the ‘feel good factor’ which both British retailers and the economy so badly need.
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