Why prop­erty taxes could be hold­ing back house build­ing

Prop­erty Opin­ion

Yorkshire Post - Property - - PROPERTY NEWS -

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

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