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Property matters: A tax of unintended consequences

Property matters: A tax of unintended consequences

This time last year, it all looked so simple. A meteoric rise in property prices in prime central London and a favourable investment climate for buy-to-let lenders were seen as two ideal ways of adding to the Treasury's coffers at a time when the government's timetable on reducing the budget deficit was coming under increased scrutiny.

Measures introduced included increased stamp duty of 12 per cent on anything paid for a house over £1.5m, while landlords faced paying an additional 3 per cent stamp duty on any new purchases. And with the same sweeping brush, a timetable to ultimately cut tax relief on mortgage interest payments was introduced for landlords.

Taking the stamp duty hike on expensive properties first, the effect was immediate; transactions tumbled along with prices. But the trend accelerated in the wake of the referendum result. Prime central London forms a tiny part of the overall housing market, but the effects have been little short of spectacular. According to residential property adviser London Central Portfolio (LCP), transactions in the three months to August 2016 on properties worth more than £10m slid to just five from 35 a year earlier. On top of this, the average price paid for the top five most expensive sales collapsed from £22m to £16.3m. Over the same period, the percentage of new-build sales dropped from 23 per cent of all sales to zero. The effects have reached beyond prime central London, too. So, whereas 30 per cent of all sales in the most desirable postcodes involved sale prices of above £10m, in the three months to August the percentage dropped to zero.

Everything depends on the stance taken by new Chancellor of the Exchequer Philip Hammond, something that will become clearer with the autumn statement on 23 November”

LCP calculates that just in those three months the lack of super-priced sales will shave around £45m off stamp duty receipts. And the trend is likely to continue because new high-priced developments are now being reworked and divided into smaller units that will attract lower stamp duty. The only ray of sunshine - again, another unintended consequence - is that overseas buyers may be inclined to brush aside the hastily erected financial barriers because sterling's 20 per cent decline against the US dollar makes buying a posh house in central London that much cheaper. However, non-UK residents owning a property in the UK are now subject to the same capital gains tax rules that apply to a UK resident.

For buy-to-let landlords spitting blood over the prospect of, in some cases, a tax bill that makes the whole process uneconomical, many have elected to pull up the drawbridge. According to crowdfunding platform Property Partner, four out of 10 UK towns and cities reported a drop in the number of buy-to-let properties listed on the market in September, continuing August's decline. New rental advertisements in Manchester and Birmingham fell by around 13 per cent in September from August, while in Oxford and Canterbury the drop was nearer 25 per cent. By contrast, and perhaps against expectations, London saw new rental property listings increase in September by 1.4 per cent, a considerable improvement on August when the supply dropped by 16.4 per cent. Institutional funds being used to back purpose-built rental accommodation could at some point help to ease this shortfall, but that will take time. And with the taper on mortgage tax relief coming in next year, the number of landlords walking away could accelerate. For those with significant mortgage exposure and minded to stick it out, the obvious way to help balance the books is to increase rents quite significantly; and that's bad news for tenants.

However, there may be a ray of hope. Everything depends on the stance taken by new Chancellor of the Exchequer Philip Hammond, something that will become clearer with the autumn statement on 23 November. And a look across the water to Ireland may provide inspiration. In its 2017 Budget, the Irish government plans to reverse its own version of the landlord tenant tax whereby interest relief will be increased from 75 per cent to 80 per cent and back to 100 per cent over a number of years through annual 5 per cent increases. That shows considerable bravery (for a politician) in admitting that the tax didn't work. In fact, within three years of its introduction, build-to-rent output fell while average rents rose by 50 per cent.

 

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Read more articles by Jonas Crosland in Property Matters.

Read more on property including buy-to-let, commercial property and overseas property.

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By Jonas Crosland,
03 November 2016

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Jonas Crosland

Jonas Crosland is a companies writer, and covers the life insurance sector, asset managers, general financial as well as construction and house building.

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