There are two main changes which the budget has brought up which will affect the property market, specifically the central London property market where most of the large value transactions take place. These are the increases to stamp duty. One is the increase for properties over £2m which has gone to 7%, the other which has caused more controversy is when a ‘non-natural person’ buys a property which includes companies, and partnerships in which a non-natural person is a partner, the stamp has been increased to 15%.
It has been argued the use of the term ‘non natural person’ is too wide stating this will catch companies quoted on the stock exchange(such as REITS) and widely held collective investment funds, but interestingly it does not catch some esoteric overseas entities which do not fall within this definition.
Savills estimates there are 74,000 homes in the UK worth more than £2m, with 75% of transactions in London, incidentally Savills shares fell 2.4% on Budget day.
The aim of these taxes is to tap into the lucrative central London property market to raise money for the government coffers. Inevitably when the economy is stagnating and the property market is going up by 11.6% per annum – according to estate agent Knight Frank, the government will want a piece of the pie.
In fairness Stamp duty loop holes have been exploited for decades using cooperate structures and it was long overdue for an overhaul. However the current duty of 15% on those using a corporate wrapper has been described as an emotional over reaction and has the potential to make the UK an unattractive place for non-domiciled investors.
According to the IPPR a think tank calculates that £5.2bn in foreign money entered the prime London market in 2011, up from £3.7bn in 2010. The capital properties have become a kind of global reserve currency for the wealthy elite of the capital rich countries
The aim of purchasing property in an offshore company is not always to save tax but helps protect privacy of the purchaser. Many purchasers want to act discreetly and not reveal the ownership to all and sundry. Currently anyone willing to pay a few pounds can go online to and obtain a record from the land registry in a few minutes revealing the ownership of a property.
Purchasing in an offshore company used to mean you pay stamp duty land tax on the initial purchase but on the resell you only sell the company and the future purchaser would benefit by only having to pay0.5% stamp duty.
They would be buying the shares in the company rather than a property. These are known as SPVs. meaning special purchase vehicles. There are of course other benefits beside stamp duty and privacy, for example the capital gains and inheritance tax benefits to of shore ownership.
Meanwhile, the government has said it will consult on introducing an annual charge on properties valued over £2m that are already held in a company, to be introduced from April 2013. In addition, non-residents owning UK residential property through an offshore company could next year face a capital gains tax charge when selling.
The real question is whether this will make a significant effect on the property market. An increase in the stamp duty by 2% is not likely to change the level of growth the central London property market has been experiencing when the market is going up over 10% per annum as has been the case over the last year.
A 2% increase on the cost price is not likely to dissuade an investor. If for example someone bought a £2m property last year and the property went up 11.6% the gain would be £232,000 if an extra £40,000 was paid, which is the 2% increase in stamp duty it will not be a deal breaker.
In an offshore company though this would have a far more serious impact. The charge in the same scenario will be £300,000, that’s a steep price to pay.
The quadrupling of stamp duty tax rates between 1997 to 2000 saw new avoidance schemes being heavily promoted to home buyers – an area of the market now targeted for an “aggressive” crack down by the government.
The introduction of the stamp duty land tax (SDLT) in December 2003 went some way to tackling avoidance schemes, moving the stamp duty regime away from a document-based tax to a transaction-based tax, greatly reducing the number of mitigation schemes available.
New rules in 2004, and introduced subsequently for SDLT, required the disclosure of tax avoidance schemes.
Currently there are many schemes on the market being advertised. A google search for ‘stamp duty avoidance’ reveals 926,000. The most popular one being marketed widely was based on a sub-sale relief. This one unsurprisingly has come under the HMRC radar.
This is where a buyer immediately transfers a property to another person, who may be a connected party, and is therefore not liable for stamp duty. The sub-purchaser has to pay the SDLT on acquisition of the property but the scheme works by either the sub-purchaser acquiring the property for a reduced or negligible purchase price, or where the sub-purchaser takes advantage of a relief from SDLT, which is not available to the first purchaser.
Last year’s introduction of a 5% stamp duty rate for properties purchased for more than £1m saw this mitigation technique increase. On a property costing £2m, the SDLT charge would be £100,000.
There does exist on the market more clever schemes which have gone unnoticed by the HMRC and which will continue to be used increasingly given the latest rise.
The question as investors is to what extent these changes will impact the growth of the prime property market in London. There will certainly be a dampening effect especially as a major driving factor of this market is funds coming into this market from overseas. The demand for properties below £2m will increase given the jump of 3% in Stamp duty. There will be a hold off and wait scenario given the government will be introducing charges for holding these properties.
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A Property Investment Company