Government policy on property and construction is exacerbating the UK’s housing crisis and a drastic rethink of tax policy, including a cut to SDLT as highlighted by your Call Off Duty campaign, could help the housing market to recover.
The overwhelming message from our Property and Construction Outlook 2016 survey was that, as far as the property industry is concerned, government policies are largely unhelpful for the market.
More than two-thirds of respondents to the survey (68%) believe SDLT is the “biggest tax barrier to business growth” and there is no doubt that the levy is having a harmful effect in the residential property space, too.
Increasing supply, rather than trying to reduce demand through high levels of taxation, is clearly a sensible way to resolve the housing crisis.
Promoting planning efficiency and improving regulation are essential aspects of stimulating the market. The existing policy of high taxation is not helping: the drop in housing transactions due to high levels of SDLT is resulting in less revenue for the government.
Property tax reform is urgently needed
Property tax reform is urgently needed, and policy in this area should detach itself from political motivations. SDLT in its current form is prohibitive and reduces housing transactions and therefore development. This is particularly applicable to the high levels of SDLT on higher valued properties introduced by the former chancellor.
The upcoming budget would do well in taking the opportunity to cut SDLT which will allow more liquidity in the market and ultimately stimulate house-building. The tax can be equivalent to a number of years’ rent of a similar property.
Uncertainty around Brexit and the potential tax fallout of the UK leaving the EU continue to hamper confidence, although our survey does indicate that there is confidence about growth prospects in the longer term.
It is the government’s responsibility to ensure stability and to create an industry environment that is favourable for healthy competition, international operation and development opportunities. Cuts to SDLT are imperative, but the government should also assess other ways to stimulate supply and transaction.
According to OECD findings, UK property taxes accounted for 12.7% of the total tax burden in 2014; comparing with an average of just 5.6% across the OECD’s 35 member states. UK policy is not aligned with international trends and best practices. Since 1965 (when the figure stood at 8%), the international average for property taxation as a proportion of the total tax burden has slowly fallen. In the UK, however, there has been a different story.
A radical shakeup of property taxes could increase supply and increase HMRC’s tax revenues at the same time. There have been numerous changes to the property tax system in recent years, including the annual tax on enveloped dwellings (ATED) regime, increased SDLT rates, the introduction of non-resident capital gains tax on residential property, interest restrictions for landlords, and new anti-avoidance rules for overseas developers.
While some of these have leveled the playing field between UK and overseas developers and investors, they have pushed up tax costs which is likely to restrict investment and increase rents. Is this really the way to increase housing stock?
In short, the industry should stop being viewed as a cash cow. With Brexit concerns lingering, policy should be tweaked to address the issue of stagnating supply.
Reductions in SDLT would ease pressure and support the natural churn of the market, freeing up property, supporting supply and potentially increasing government revenue through an uptick in transactions.
This article first appeared in PropertyWeek.com in February 2017.