Why property taxes could be holding back house building
David Hannah, Principal Consultant and founder of Cornerstone
THE RECENT Housing White Paper declared that the UK needs to be building more homes, and faster, and the national housing situation requires a great deal of reform.
Property tax, in particular, is one of the largest hurdles that developers and homeowners need to overcome, and there is a series of common misconceptions that are obstructing the smooth operation of the housing market.
Unless a property is being purchased to replace a main residence, it is very likely that the buyers will be hit by the three per cent surcharge. However, a lack of understanding of the legislation behind the tax, and the fact that there is not only one fixed rate, is causing a great deal of anxiety in the market.
A common oversight is the identification of mixed use assets. Where a commercial element, forestry, or paddocks are clearly present, a different rate should be used. Buyers should therefore consider not just what the property is currently used for, but the potential for commercial endeavours.
Equally, if a property features a self-contained flat, or annexe, then it falls into the multiple dwellings category. In this case, some careful calculations need to be done to confirm the amount of tax – a property can be both commercial, and multiple dwelling.
The property tax system can also be difficult to navigate for small investors, who have been hit hard by the government’s decision to take away mortgage interest relief from buy-tolet investors. Many of those affected believe incorporation is the only way forward, and as a tax practice, we have been incorporating portfolios since 2006, but there are several issues involved with the process on which incorrect advice is regularly given.
The concept that a partnership can only be incorporated if it is an LLP is incorrect.
Whether the incorporation has been undertaken for Capital Gains or Stamp Duty purposes – the legal form of the partnership does not matter.
The notion that an investor can only incorporate if they own six or more properties is also misunderstood. You can incorporate with just a single property, if it is a property business. The reference to the ‘six properties’ is linked to the application of either residential or commercial SDLT rates, and nothing to do with whether a property business can be incorporated.
From a developer’s perspective, tax complications can be a major barrier when it comes to getting homes built.
It is vital to pay attention to the details, and the finance structuring, of the transaction, to avoid tax charges that shouldn’t be incurred – developers are too often focused on getting a deal through.
It shouldn’t ever be the case that tax is paid on finance cash flow within a deal, which is what is happening in too many cases. This is down to the lack of investment in the structure of the deal, where borrowers end up effectively paying SDLT twice, affecting both housing stock and end user prices negatively.
The burden of property tax often decides whether a scheme will go ahead or not. While we cannot remove tax all together, we can ensure by paying the correct amount, a major hurdle to house building financing is removed, resulting in more homes being built across the UK.
David Hannah is the founder of Cornerstone Tax.
If you buy property for more than £125,000, you pay Stamp Duty Land Tax. For more details on stamp duty land tax and capital gains tax visit the government website www.gov. uk/buy-sell-your-home/tax