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Property Tax-Gate and ‘Cliff’ Hangers

Tuesday 8th January 2013

The year that was: Property Tax-Gate

The UK has always been a ‘tale of two cities’. There is the national domestic housing market and there is prime London Central, a world class destination which is an international, not a national, player, says Naomi Heaton, Chief Executive, London Central Portfolio.

According to Land Registry, average prices in England and Wales over the year have remained largely static, increasing by 0.75% to £249,958, whilst sales activity increased slightly with transactions up 3%.

Prime London Central (PLC) shows a completely different picture. Prices rose 15.3%, bringing the average property price to £1.35m, 5.5 times higher than the rest of the country.

For the first time, the average price for a flat breached the £1m mark, reaching £1,024,250. However, transactions fell by 9%; a combination of people holding on to their best performing assets and a ‘wait and see’ attitude due to proposed property tax changes.

The 2012 March Budget saw Stamp Duty raised to 7% (from 5%) for properties purchased over £2m. This was inevitably a tax on London, given 77% of properties over £2m are located here. Homeowners outside Central London felt the brunt of this rise, with sales in the £2m - £5m sector decreasing by a staggering 53%.

The Chancellor also introduced a Stamp Duty charge of 15% on properties over £2m bought through a company and revealed plans for an annual levy, now called the Annual Residential Property Tax (ARPT), as well as a CGT charge on their sale.

The end of the year brought positive clarification and good news for many. Carve-outs from the 15% SDLT were established for bona fide businesses such as developers, traders and investors holding buy-to-let properties, in recognition of their commercial nature and crucial importance to the UK economy. They will be subject to the standard 7% SDLT rate but exempted from ARPT and CGT.

The year ahead: ‘Cliff’ Hangers

The changes in tax legislation and new exemptions will undoubtedly impact on London Central’s performance. Generic projections will not be credible for 2013. There will be different dynamics, depending on the price point within the market place and whether properties are bought for business or owner occupation and in personal or company names.

For the first half of the year at least, £2m will be a watershed for London.

Sub £2m – All purchases

There is no reason to believe business will not be as usual in this sector. There have been no tax changes, either for individuals or companies, and all the fundamental drivers are still in place – a safe haven, a financial and cultural centre and a ‘go to’ destination.

Research from LCP shows the PLC property market (under £2m) has shown average annual price growth of 8% since 1996. On the basis that this trend line continues, the average price of a flat would be little over £1.1m by the end of this year.

Added pressure and bunching is likely to occur just under the £2m mark with purchasers, individual and corporate, looking to avoid the new taxes imposed above this level.

This may provide even richer pickings for international investors, particularly in the Private Rented Sector (PRS). For those who acquire property under £2m it is likely that the early bird will catch the very fat worm.

Above £2m - Bona fide businesses and the Private Rented Sector

The recognition by the Government of the importance of the PRS in PLC, which represents 50% of all residential purchases, is to be lauded. They took note of the 180 parties involved in the consultation process, of which LCP was a vocal participant. The PRS already generates around £1.5bn worth of economic activity in the UK a year and the exemptions put in place by the Government will be an added stimulus to this sector.

Nevertheless, LCP predict that corporate investors, with budgets over £2m, will hold back on purchases in the first half of the year, waiting for the 15% Stamp Duty exemption to apply. Currently it is not clear whether this will be at the beginning of the new financial year in April or when Royal Assent is granted in July. The second half of the year, however, is likely to bring in a surge of activity as investors come back into the market. This should correct and surpass what is likely to be a lacklustre performance in the first half of the year.

Above £2m – Owner Occupiers

The new 15% SDLT for owner occupiers buying through companies, together with the introduction of ARPT next March and anticipated CGT (still under consultation) is likely to result in falling transactions and stagnant prices.

This will be particularly evident in the first half of the year as buyers review their tax positions and work out new strategies. They will need to weigh up the cons of purchasing through a corporate vehicle versus the pros of IHT savings and personal privacy.

Bunching is likely to occur at the top end of each price band due to the stepped ARPT increases of £35,000, £70,000 and £140,000 at the £5m, £10m and £20m mark respectively. This will be particularly evident at £5m where the ARPT sees its steepest increase of 133%, over the £2m - £5m rate of £15,000.

However, by 2014 at the latest, it is likely the new taxes will be accepted as part of the investment cost of buying into a world class market; in the same way as the series of SDLT rises have been over the years.

As far as the domestic market goes, usually typified by people buying in their own name, the pain of last year’s SDLT rise will gradually work its way through. All of which suggest that the market will be back on form by 2014.

In summary, the market performance in 2013 will be mixed with average prices and overall growth trends will not be meaningful indicators. LCP’s view is that the market under £2m will continue to be buoyant, reflecting long term growth trends. This will be counter-balanced by a hiatus at the upper end of the market, which will be resolved in due course.

 

              

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