Sales of homes at the top end of the housing market have collapsed over the past 12 months or so, especially in London, and while some people will point to Brexit-related uncertainty as a contributing factor, the reality is that aside from high property prices, rocketing stamp duty (SDLT) rates are the primary reason for the staggering market slump in the capital's prime property market.
The sharp decline has triggered major concern among housebuilders and estate agents specialising in the prime market with some reporting that high SDLT at the top-end of the market is not just stalling activity levels, but also pushing more buyers into the sub-£1m bracket.
The next government is unlikely to reduce SDLT, but that does not mean that there are not potential solutions for those looking to invest in London's high-end housing market, according to Trevor Abrahamson, a veteran luxury estate agent who heads up Glentree Estates in north London.
He said: “We all know that a number of years ago, the former Chancellor Osborne hiked SDLT rates for properties above £900,000 and this has now caused a DIY recession in the London’s residential property market, such that turnover of sales is down by 70% and values by about 25% from the former highs of 2014. In some sectors the market is stodgy and illiquid. What did Osborne expect?
“The market has become distorted and one should remember that SDLT maybe an easily collectable tax for the HMRC but is, at the same time, easily avoidable by homeowners, not moving. However, some people do want to move.”
Here are Trevor Abrahamson’s thoughts when it comes to reducing stamp duty where possible:
+ Buying shares in the owning company rather than the asset itself
Some homes are owned by an offshore company rather than in an individual’s name. Although this may be the preserve of some of the more expensive properties, especially in London, if potential purchasers were to buy the shares in the holding company, which owns the property rather that the asset itself, they will pay a very reduced rate of stamp duty. The rate drops from the more usual 12-15%, to a much more affordable 0.5% although there will be an annual ATED charge on the company (the tax payable annually by non natural persons such as companies).
It is true that buying the shares in an offshore company carries with it a higher inherent risk, since the corporate reporting standards of certain countries, such as the Virgin Isles and Panama, are not equivalent to the UK, but with the penal stamp duty rates now imposed, this has become a more acceptable commercial risk. Usually, the seller is indifferent as to whether they sell the asset or the shares in the special purpose vehicle and, sometimes, they even want a share of the tax benefit.
+ Buy land that could be developed into a home instead of an existing one
If you find a piece of land with a planning consent to build a new home, invariably the purchase price is approximately 33% of the finished property. This means, by deduction, you are saving around 66% of the stamp duty that would have otherwise been paid, which could amount to a whopping 10% of the value of the property when completed.
There are other benefits to building from scratch, since new construction is zero rated from a VAT point of view, whereas the building costs to refurbish an existing property are chargeable at the full 20% rate, unless the property has remained empty and untouched for two years, whereby the VAT drops to 5%.
So you could say that this process may well save the buyer, in aggregate, 16% of the total value of a completed house and should not be ‘sniffed’ at. This is a demonstration as to how the market has become distorted by tax impositions.
+ Buy a new home in an existing development
If you purchase a property in a new development, the developer may be willing to pay your stamp duty costs for you, or reduce the purchase price, especially if there is an oversupply of new build homes in the local area. If this were the case it could be a very tangible saving.
+ Ask the seller to share the stamp duty costs with you
Given that market activity has reduced considerably in certain sectors, there are usually more properties for sale than there are purchasers to buy them and in certain cases, you could ask the seller to share 50% of the stamp duty costs, which are normally paid exclusively by the purchaser.
Although sellers don’t always want to ‘share this pain’, by agreeing to this they help to close the gap between the price offered by the buyer and an acceptable one in order to reach a deal.
Reflecting on the government’s decision to increase stamp duty rates at the top-end of the market, which has caused activity levels to grind to a virtual halt, Abrahamson had this to say:
“What did any sensible person expect to happen to the residential markets when SDLT was doubled? You could ask what the implications are for any market if a tax were doubled? This was done for political purposes but the ‘fall out’ from this is very real.
“What exacerbates the problem of liquidity is that purchases are not taking place since prospective buyers can’t sell their own properties and the length of sale chains are becoming ridiculous.
“It is true that values are down far greater than stamp duty has been put up, but nevertheless buyers find it abhorrent to pay this punitive tax and invariably decide not to move at all.
“Tax receipts for the Treasury are down, when you exclude the buy-to-let rush of March/April 2016 and the government has only themselves to blame for this. As the renowned American economist Arthur Laffer was often quoted ‘if taxes are too high, people do their best to avoid them’.
“As has been muted in the press recently, were a capital gains tax be applied to personal, private residences (PPR) above £5m, it would be the death knell of the property market as we know it, particularly in London and it would be ‘sayonara’ for everyone connected with it.
“Whilst I have been in the game for over 40 years and successfully traversed four recessions along the route, if this additional tax were to be imposed on top of the Stamp Duty debacle, it would signal ‘the end of the road’ for the markets in the higher sector in London. It may then be an opportunity to play more golf, go fishing and spend more time with the family. Who would have thought that the perpetrator of this intractable problem would be a Conservative government?
“I hope that the Chancellor is listening to this good advice, since retail spending is down and as we all know, a healthy, growing residential property market is a prime stimulant for the UK economy as a whole and helps debt shrink in relation to equity for many homeowners.
“Don’t forget, over time asset owners have become wealthier, whilst non-asset owners have become poorer and this applies across the value range from cottages to castles.
“Take note Mr. Hammond, if you are still the Chancellor by the autumn.”