"One of the biggest challenges, but also a key principle that all taxpayers want to see, is how to ensure that the system of property taxation is fair"
- Mark Baycroft - HaysMac
The recent Budget’s only significant change to the taxation of property was to increase the Stamp Duty Land Tax surcharge for additional dwellings from 3% to 5%, continuing a pattern of tinkering with the existing SDLT system rather than looking at reform.
The wider tax increases in the Budget also continued the same pattern of increasing rates and reducing allowances, making marginal but unpopular changes to the existing system rather than looking at reform and simplification.
The problem with such changes is that they usually, intentionally or not, lead to changes in the behaviour of individuals and businesses. Whilst using the tax system to incentivise certain types of investment can be beneficial, the tax position should be an added extra and not the main reason for business or personal decisions not least because using the tax system as a blunt instrument to drive behaviour may have a bigger impact than expected from forecast models.
Short-term thinking
It is natural that a Government’s initial thought is to consider what they can achieve before the end of the current Parliament, but with their current majority, this Government could have taken a longer-term view rather than simply amending the existing tax system to plug the gaps in the nation’s finances.
The current system of property tax is one area where a longer-term view would be beneficial. The current SDLT system is unpopular and can prevent individuals and businesses from moving to alternative locations that otherwise fit all their requirements.
The current systems of Business Rates and Council Tax clearly show inequalities and in the case of Business Rates the reliefs for certain industries are nothing more than a short-term sticking plaster to cover the painful increase that would otherwise occur.
It should also be recognised that changes to the current systems are also not guaranteed to produce the expected tax receipts; with the rise in the SDLT surcharge more people than expected may choose not to purchase a second property.
Longer-term options
The biggest advantages of taking a longer-term view are that the pros and cons of different options can be considered and different stakeholders, such as investors and finance providers, can be consulted in advance of any reform. The nature of any reforms can also be given more thought, and adjustments made to iron out any obvious inequalities.
One of the biggest challenges, but also a key principle that all taxpayers want to see, is how to ensure that the system of property taxation is fair.
I do not pretend to know the answer to this question, but without taking the time to consult and then reform we will continue with the current system’s unfairness. Simplification is part of the answer, but as the following possible options for reform will show, even a relatively simple change can have adverse consequences for some.
Transfer SDLT liability to the vendor
One potential reform would be for SDLT to be payable by the seller rather than the purchaser. Whilst this would not be a simplification of the SDLT system and its numerous rates, it would be simple to implement.
This reform would be fairer to first-time buyers, who as well as having to pay the purchase price of the property also currently have to pay the SDLT, and could be seen as fairer to those who are downsizing significantly as they should hopefully have funds to pay the SDLT.
I am not convinced that this potential reform will be fairer for individuals and businesses selling one property to move to another when the values of the properties being sold and bought are only marginally different. In these cases, the seller will still be paying SDLT, just on the property they have sold not bought, and this will still have to be funded immediately from their own resources.
Update the valuation basis for Council Tax & Business Rates
Another potential reform would be to update the valuations on which Council Tax & Business Rates are based, and potentially to introduce more bands & variable multipliers for different industries.
That said whilst updating the valuations would be relatively simple, introducing more bands & variable multipliers would increase complexity and not meet the aim of simplifying the system.
Updating valuations would remove some obvious inequalities between different geographical locations, but it does not address the fact that both individuals and businesses can be asset-rich but cash-poor. There is an argument that it is fair for individual assets from a large portfolio to occasionally be sold to fund a tax liability, but I am less convinced that mortgaging large single assets without the means to repay the mortgage is fair.
A broader proposal to replace all property taxes with one based on land value has similar drawbacks when considering fairness.
There is no simple answer to the reform of property tax, but for the sake of fairness and simplicity of the tax system in the long term reform is needed, and the sooner consultation starts the better.
