Property taxation

High-end property is a tempting target for any cash-strapped chancellor confronted with a struggling economy: it can’t move to Monaco and it is owned by those with money. Even better, it is increasingly owned by those with money who can’t vote because they are citizens of somewhere else. With an election looming and a left-of-centre government looking increasingly likely, property and wealth taxes are moving towards centre stage. As with all taxation there is the calculation of pain and gain, unintended consequences and the well-being of the proverbial golden goose to consider.

Perhaps a good place for the chancellor to start is to work out his objectives. Is he trying to raise money in a serious way – or is he trying to change behaviors? Or both? A good example of the latter would be an attempt to stop London real estate becoming the asset of choice for the international rich that only use it for a few weeks a year. The perception of this trend is firstly, that it hollows out the city centre and creates ‘dark space’: a stroll down Eaton Square at night illustrates this well with hardly a light on over the square. Secondly, and more importantly from a political point of view, is the perception that this inflow of money is pushing prices up in areas that these international buyers have never heard of. For the middle classes that live in London, have children and can vote, this is becoming a live issue and one to which London MPs of all stripes are beginning to respond. It is also an area where Boris Johnson, normally a politician with deft populist antennae, is beginning to look out of touch in his pro-developer, world-city rhetoric.

Some are now talking about some sort of Residency Tax to deal with this. If the property is bought for investment and it is let to someone who is living in it, then no problem. If it’s empty other than the odd week a year, then it is - and the Residency Tax could apply no matter who the owner is – probably on some sliding scale dependant on the number of occupied days. The principle of self-assessment could be applied – with random checks and fines for the evaders.

Of course the issue of revenue generation and influencing market behaviors are often two sides of the same coin. The application in the Autumn Statement of Capital Gains Tax to non-residents’ property profits is such an attempt. But will it succeed in either of its objectives? Is it going to put off the non-resident speculator? Unlikely – Capital Gains Tax is a classy problem after all. And is it going to raise a lot of money? CGT on property in total raised £783 million last year and extending it to non-residents, fair though that may be, is not likely to raise a huge amount more; estimates vary between £50 million and £100 million a year which is not much more than a fancy mansion in Mayfair and a rounding error in a £120 billion deficit.

The one that is causing the main anxiety is a possible Mansion Tax – which is a Wealth Tax by another name – as it was originally floated it would apply to property valued at over £2 million and would raise over £2 billion in extra revenue. Taking the revenue bit first, Knight Frank recently produced an interesting paper (http://my.knightfrank.co.uk/research-reports/taxation-of-prime-property.aspx) concluding that, as currently proposed, any such tax would be lucky to raise half that amount; better than £100 million but it will have consequences – unintended or not – in terms of migration of productive wealth as well as the desired brake on the more speculative kind. The £2 million start level is arbitrary and is already causing market distortions around that level – which now includes almost any family house in Fulham – and any house at all in Central London. Then there is the ‘little old lady’ issue: the taxing of those that have become asset rich but are income poor - and would have no way of funding such a tax except by selling their house. This might, however, be an intended consequence in order to free up housing stock. Lastly there is the practical issue of valuation: this could be expensive and lengthy - but a sufficiently ruthless Treasury could push the whole burden, with time penalties, back onto the homeowner.

An interesting spin on the Mansion Tax, that would answer some of the practical objections as well as the fairness issue, is to make the tax graded rather than applied at an arbitrary level – and based on the purchase price rather the current value. That information is already on record and it deals nicely with the ‘little old lady’ problem as she would certainly fall below the radar. From a political point of view, it would also leave behind most – but not all - voters and fall squarely on the aspirant speculator – particularly of the Johnny-come-lately variety. How much money it would collect would depends on how it was graded. As a general rule a little tax collected from a lot of people tends to raise more revenue than a lot from a few - with VAT as the best example of the former and CGT of the latter.

If a Mansion Tax is currently scaring the horses, the much more likely final outcome is a change in the Council Tax. This is a big earner raising £25 billion per annum. After Mrs Thatcher’s political immolation by the Poll Tax, politicians are understandably wary of picking up this particular hot potato. Indeed so chicken have they been on this that fully three-quarters of local government expenditure is met out of the central purse. And half of the revenue is anyway raised from business rates which have the great advantage of being extracted from those that - you’ve guessed it - don’t vote. They have also made a significant contribution to the boarded-up shops on most British high streets. However there are clear anomalies in the residential price-bands which mean that a Russian oligarch only pays £1361 per annum on his £30 million mansion in Grosvenor Square and his divorced wife only £2,143 on hers in Chelsea Square. When we once told an American client the extent of his local taxation liabilities his only question was interesting - ‘per week?’ It is more than likely that another two council tax bands will be added whatever the stripe of the next government. How much difference that will make to the deficit reduction project is, however, a moot point.

And then there is the old favorite, Stamp Duty: always a favorite as it is transactional and mentally gets put in the box labeled ‘cost-of-moving-house’ - and it is collected by lawyers. It also already pulls in a serious amount of money - £5 billion last year. What’s not to like? A drag on labour mobility for one. The other problem is that it is already high by international standards and, as has been proven, there comes a point where higher taxes simply don’t get paid as the folk that pay them don’t move as much. Any increase here would probably be self-defeating.

This whole subject of property taxation is complex and deeply political, with anomalies everywhere. Why should buy-to-let investors, for example, get tax relief on their mortgages while families trying to put a roof over their heads get no such break? The Policy Exchange think tank has just produced an excellent paper on the whole subject (http://www.policyexchange.org.uk/publications/item/taxing-issues-reducing-housing-demand-or-increasing-housing-supply?category_id=24) of which the executive summary covers most of the relevant ground. As the Policy Exchange founder was Nick Boles, the Housing Minister, it has friends in high places. The only certainty is that with inequality widening by the year and governments looking for revenue where they can get it, it would be naïve to think that one of the biggest pools of wealth around – and one that can’t move – won’t get tapped at some point.

One way or another. Or both.

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