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Taxing the golden goose

In the first week of starting back at the office this year, I have been to see five properties. All good deals, and this is without even going out fishing for them. They come from the momentum already generated on the back of last year.

One particular property which struck me is a freehold house in a strong road in W1, of over 2,400 sq. ft. We can get this for £1,100 per sq. ft. It’s a freehold which is rare and this means you do not have to pay ridiculous service charges to some freeholders who have owned the block for three generations and don’t do any decent work for the upkeep of the property.

Prices here should be at least £1,500 per sq. ft., the property needs no modernisation, the ceilings are high and it has some beautiful features, and it is a great example what you should expect of a town house in Central London. It has been well maintained and looked after by the present owner occupiers. The reason for sale is they have simply out grown the property and it simply doesn’t suit their purpose.

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So why the reduction? One reason which comes to mind is the dreaded mansion tax; first introduced by Vince Cable in 2009 at a proposed 0.5% for properties which are priced in excess of £1m. David Miliband from The Labour Party then took this baton and revised it to 1% on homes above £2m.

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Currently Labour has promised to implement this tax if they come to power in 2015, apparently this has been done to help raise £1.2bn for the NHS. It seems they have attached such a lofty reasoning for the tax no doubt to make it not such a bitter pill to swallow. However I’m sure if they stopped war mongering in other countries the same if not more could be raised.

In the interim the Liberals have dropped the idea in favour of council tax bands designed to hit the top end of the market.

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It is unclear how this tax would be implemented, the details have not been clear, will it be applied on the excess amount above £2m or will it be on the whole property? Applying it on the whole value would be an unfair way of implementation and create kinks in the market which buyers and sellers would seek to avoid. For example it would be difficult to sell a property for £2.15m even though this may be the natural price of this property. It being unfair does not mean it will not be implemented, the last stamp duty prior to December 2014 was based on this same principal and was around for decades. Under this system it was difficult to sell a property near the levels where the stamp duty jumped.

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The £2m threshold suggested is a base figure, this level would rise with the average property prices, how this would work also has not been revealed. The tax will also be based on bands where in the amount will increase after certain steps. Recently Ed Balls suggested those who own properties between £2m-£3m will only pay £250 per month. This seems a very moderate rise compared to the 1% banded around.

Given the huge uncertainty regarding this proposed policy and the lack of information regarding its implementation, no one is able to take an informed judgement on how to react to this possible proposal.

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This is causing nervousness and fear in the market place; two very necessary things required to bring deals to the surface. People fear more than they are joyful, this is a direct consequence of modern society and specifically the media. When the population watch television they are being programmed, visually and orally, mostly fear based news is spewed out of this picture frame.

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This oddity in behaviour can be translated into hard cash for the brave investor. Deals are surfacing which one would be hard pressed to see even in the last few years. Many fear mongers suggested the previous stamp duty rise would stifle the property market, it did initially but soon after property prices rose to record levels.

It is interesting to see the effect similar mansion taxes have had on other countries around the world. Hong Kong, for example, levied a tax on foreign investors in 2012 and increased a transfer tax on expensive homes in 2013. Since then, transaction volume has fallen to about 8,000 home sales a month from more than 12,000 in 2011, according to research firm Colliers International. But home prices have proven resilient. While they initially fell about 5%, they have bounced back to record levels.

If the Hong Kong market has proved to be resilient, clearly the London property market has even more resilience. This will be a temporary blip on a market destined to rise long term.

It is worth buying with some intelligence of course. Properties around the £2m-3m mark will be at the bottom end of this tax. Seeking out freehold properties will mean there will be no service charges to pay, therefore the proposed mansion tax will be slightly more digestible. Or in the case of flats pay particular attention to the service charges levied currently and proposed. There is no harm in paying service charges if you’re getting the service but not to fund the freeholder’s coffers. So distinctions must be made between blocks of flats according to the management and freeholders.

It is clear property is one of the few lucrative and stable ways of making money in the UK. It is given the government need to raise funds, and so therefore property will be in the line of fire in some shape or form either this year or in coming years. But the government have to be careful not to kill the golden goose, property investment brings in a lot of money from all over the world into London. Off the back of this a whole raft of employment is driven, not to mention the spending power these investors have which can been seen by the exclusive designer shops in New Bond Street.

There are means and ways to exploit this short window of opportunity, even if your budget isn’t huge give us a call you will be surprised with what we can do.

The Real Deal

Bryanston Square, London, W1H

Purchase Price: £1.3m

  • A large two bedroom upper ground floor flat
  • In excess of 850 sq. ft.
  • Highly sought after location
  • Probate sale
  • Share of freehold
  • Needs modernisation
  • Moderate service charges
  • Well kept communal area facing the prestigious Bryanston Square
  • Below the Mansion tax threshold

Call us now to secure this deal!

Suresh Vagjiani

A Property Investment Company

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!Tips of the Week 

Three points should be considered when investing: Firstly, is the investment safe? Secondly, is it going to go upwards? And thirdly, what time period can you exit – if required.

When purchasing in auction always check the seller has held the property for longer than six months, otherwise you will have difficulty obtaining a mortgage with most high street lenders. Many properties held for less than 6 months are dumped in the auction.

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