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Treasury loses out in property merry-go-round

December 5, 2012

An abridged version of the following article appeared in this morning’s City AM. Click here to read.

With continued chatter of a ‘back-door’ mansion tax and yet another increase in stamp duty, George Osborne and Vince Cable should take heed of the dramatic falling off in tax receipts after the last Budget in March.

At that time, stamp duty was hiked to 7% for people buying property over £2m in their own name and 15% for companies.  There was neither prior consultation nor any detailed analysis to back up these announcements.  Plans were unveiled to impose an annual charge of up to £140,000 per annum on companies as well as a new capital gains tax.  These measures clearly took aim at London, where some 77% of properties valued at over £2m are located and failed to take into account the likelihood that additional complexity in this area would likely promote tax avoidance.

Now the government’s very own data – just published for the third quarter of 2012 by HM Land Registry and analysed by residential investment specialists, London Central Portfolio (LCP) – reveals in stark detail the detrimental impact of the measures.  There has been a staggering 53% decrease in Greater London property sales between £2m and £5m, where most of the domestic market is located, compared with this time last year. This indicates an instant loss of around £25 million to the Exchequer.

The data also shows that in the two prime London central boroughs (the City of Westminster and the Royal Borough of Kensington & Chelsea), sales across all price bands slumped by an average of nine percent as buyers anticipated further tax uncertainty.

This reduction in sales and tax receipts is an unwanted fallout for the already ailing UK economy.  Whilst many readers, even of City AM, may not think this affects them, think again.

Property investment does not just generate profits for property owners.  In central London, half of the properties in the private sector are bought for rental investment rather than owner occupation.  Known as the ‘private rented sector’, this not only stimulates significant tax revenues, it actively fuels economic growth.  It brings employment to lawyers, accountants, architects, builders, cleaners, electricians, designers and the list goes on.

This job creation ripples far outside of the M25, generating work for paint manufacturers in Bournemouth to furniture makers in Birmingham.  It has been estimated that for every Central London property bought for rental, there is an associated economic spend of around 20% of its value, to the benefit of jobs and production.

In July, HM Treasury were warned to expect a 10% suppression in central London’s private rented sector as a result of the stamp duty hikes –  a frightening prediction which appears to be coming true. It is further estimated that if the new legislation goes unchanged, by the next election there could be a loss of over £500m to the economy, equivalent to over 4,000 vital jobs and this from a measure designed to bring in revenue to Treasury coffers!

Truth be told, the increased costs for landlords will also be passed down as increased rents, making London less attractive to multinationals as a place to do business.  Clearly, the Treasury has failed to analyse the further consequences of a shrinking private rented sector.  Corporate HQs and the internationally mobile have global choices – many can, and will, relocate.  Corporate tenants and privately educated foreign students in central London support the economy in a major way, contributing to the £10bn spend on the retail trade, education, the night time economy and tourism in the heart of the capital. International investment is also often the difference that makes development viable, supporting cash flow early on and underpinning the provision of public amenity and affordable housing via section 106 agreements.

Taxing the ‘rich’ may tick the populist box, but  Vince Cable’s glib comment that it is easier to tax property because it cannot be transported to Liechtenstein completely misses the point.

People who hold property in the UK have chosen to have a footprint in the UK; even in central London they generally are still British. They will have worked hard to earn their money, they will have paid their taxes along the way. The Government is indicating its desire to go for the soft target, rather than putting energy into effective anti-avoidance against the high profile multi-national corporates who have a much greater capacity to contribute to our tax revenues.

With the Autumn Statement looming, the Treasury needs to recognise the consequences of its pernicious property taxes before the negative impact on the British economy becomes irreversible. Perhaps they should also stop to consider that it would be far more lucrative to capitalise on London’s unique global appeal to encourage inward investment rather than actively pursuing a policy to reduce the UK’s attractiveness and global competitiveness.