A leading economic think tank has this week claimed that property is under taxed. The National Institute of Economic and Social Research (NIESR) has claimed that property should be subjected to an annual Capital Gains Tax.
When I read this article I was aghast. Admittedly, I have a vested interest as firstly I am fortunate enough to be a homeowner and secondly I have made a career in commercial property.
NIESR claim that property as an asset is under taxed. In this article I question whether that is really true.
The first port of call for the taxman is obviously Stamp Duty Land Tax(SDLT). Probably to head off the spectre of a “Mansion Tax”, the Chancellor has quite dramatically reformed the SDLT regime that left many with an interest in property stunned. Rates can now reach as much as an eye-watering 15%. Even before this punitive regime, the UK had the highest level of tax on property in Europe1. And of course, this tax is paid from money that has already been taxed as income at rates as high as 45%.
The second port of call is in the form of local taxation – Council Tax. Now, I would certainly not dispute that there is significant scope for over-hauling or replacing Council tax to create a fairer and potentially higher-yielding system. I cannot claim to have the answer but fancy that a local income tax levy would be a more equitable solution any changes to this tax are highly emotive – witness the bricked up windows of Georgian properties to avoid the “Window Tax”, the ugly riots in response to the “Poll Tax” and the recent calls for a “Mansion Tax”.
The next levy is not strictly a tax, but unlike many other assets or investments, property requires significant on-costs to maintain the value of the asset. A share certificate or an ISA does not require annual maintenance, management expenditure or significant legal expenditure. And all of these expenditures not only create employment but also attract VAT. Although the UK rate of 20% is one of the lowest in Europe2, it is another staggering cost borne by the individual.
And then, of course, there is already Capital Gains Tax for any property other than the principal private residence. Ranging from 18% to 28%, the higher rate puts us 7th in the European League Table3.
Next, there is for the developers out there, the Community Infrastructure Levy (CIL). Set locally, this charge can vary dramatically but can be extraordinarily punitive. One Councillor in Dorset last year proposed increasing the rate to £1,300 per square metre 4. You read that right, £1,300. This compares to actual build costs of between £550 and £1,800 per square metre.
So, is property really under taxed? It doesn’t look like it to me. And any change such as that suggested by the NIESR would be difficult to implement and have damaging economic consequences. Annual calculations of property worth are impossible to carry out, are subjective and ignore economic fluctuations. Furthermore, remove the incentive for property owners to maintain and enhance their biggest asset and you consign every tradesman, small contractor and materials supplier or retailer to a ruinous future.